Capital & Financing

Invoice Factoring

Learn invoice factoring: selling unpaid invoices for cash now (an advance, then the rest minus a fee) to bridge a slow-payment cash gap, and why the small-looking fee is a large annual cost.

  • Intermediate
  • 13 min total
  • 13 chapters

What decision this helps you make: Whether to factor invoices for immediate cash, and whether the speed is worth the (deceptively large) effective cost.

What this topic is

Invoice factoring sells unpaid invoices to a factor for immediate cash: an advance (commonly 80–90%) now, then the rest minus a fee when the customer pays. It bridges the gap when customers pay slowly (30–90 days) but your bills are due now.

Why it matters

It buys speed at a real cost: cash now instead of in 60 days. The fee looks small as a percentage but, over a short period, is a large annualized rate. Over-reliance often signals a deeper working-capital problem.

Who should learn it

Businesses with creditworthy but slow-paying customers and an urgent need for cash.

What you will understand

  • Understand factoring: selling invoices for cash now
  • See the problem it solves: slow-paying customers vs. bills due now
  • Understand why a small fee over a short period is a large annual cost
  • Know recourse vs. non-recourse, and when over-reliance is a symptom

Prerequisites

Common misconception

"Factoring only costs a few percent, so it's cheap money." A 3% fee sounds small, but it's charged over a short period (say 45 days), so the effective annualized rate is large (often 20%+). Factoring is expensive money used to buy speed: cash now instead of in 60 days. It can be worth it when the timing gap is genuinely painful, but always convert the fee to a true annual rate before deciding, and watch that over-reliance isn't masking a working-capital problem.