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How Does Factoring Work? Factoring is a transaction in which a business sells its invoices, or receivables, to a third-party financial company known as a “factor.” The factor then collects payment on those invoices from the business’s customers. Factoring is known in some industries as “accounts receivable financing.” The main reason that companies choose to factor is that they want to receive cash quickly on their receivables, rather than waiting the 30 to 60 days it often takes a customer to pay. Factoring allows companies to quickly build up their cash flow, which makes it easier for them to pay employees, handle customer orders and add more business. What is a Cash Advance? When you factor an invoice, the factoring provider advances to you a percentage of that invoice value, usually within 24 hours. The factor will then pay you the balance of the invoice, minus fees, after it collects payment from your customer. The cash advance rate can vary depending on what industry your company is in and whom you choose as a factor. The advance rate can range from 80% of an invoice value to as much as 95%. Your industry, your customers’ credit histories and other criteria help determine the advance rate you receive.
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