Invoice factoring

You’ve done the work and sent the invoice — and now you wait 30, 60, sometimes 90 days while your own payroll, fuel, and rent don’t wait at all. Factoring turns that waiting into working capital.

What it is

Invoice factoring means selling an outstanding invoice to a factoring company — the “factor” — instead of holding it until your customer pays. You get a large share of the invoice’s value now, typically, and the rest when your customer pays on their normal schedule, minus the factor’s fee. The invoice was always going to turn into cash eventually; factoring changes when.

One thing makes factoring different from most other programs: the review leans on your customer’s payment record as much as on your own file — often more. That’s why a newer business with solid commercial customers can find a fit in factoring where other structures don’t work yet, depending on how the file looks.

Advance, reserve, and fee — the mechanics in plain English

Every factoring arrangement has three moving parts:

• The advance — the money you receive up front, typically a large share of the invoice’s face value.
• The reserve — the remainder, held back until your customer pays the invoice.
• The fee — the factor’s charge, taken out of the reserve before it’s released to you.

So the sequence runs: you invoice your customer as usual; the factor advances you the large share now; your customer pays the factor on their normal schedule; and the reserve comes back to you, minus the fee. The exact split and the fee depend on the file — invoice size, your customer’s payment record, and how long they typically take to pay — and you’ll see all of it in plain terms before you sign anything.

Who it fits

• Trucking and freight companies waiting on shippers while fuel and drivers get paid weekly.
• Staffing agencies running payroll every Friday against invoices that pay in 45 days.
• Manufacturers and wholesalers selling on net-30 to net-60 terms.
• Commercial contractors and service companies billing other businesses for completed work.

Factoring is built for invoices to business customers for delivered goods or completed work; invoices to individual consumers generally don’t fit. And if the squeeze in your cash flow isn’t sitting in receivables, a different structure is probably the cleaner tool — see working capital programs or revenue-based financing.