When you utilize invoice factoring or accounts receivable factoring, your business sells its unpaid invoices to an invoice factoring company. You can choose to factor any or all unpaid invoices, but the amount you sell, and which client invoices you factor, are entirely up to you. You can even factor some invoices from a client and retain others from the same client to process on your own.

You’ll receive a lump sum payment, as much as 80% of the unpaid invoice value, and the invoice factoring company will remit the remainder to your business bank account -- after accounting for its factoring fees -- when your customer pays them.

In this scenario, your customers pays their balances directly to the factoring company, which means you’ll most likely have to discuss the situation with your customers so there’s minimal disruption to your working relationship.

This is more important when your invoices and contracts are structured to be paid back over many months. Invoice factoring tends to be better-suited for businesses that fulfill invoices or contracts with extended payment terms, because getting most of a year’s worth of payments upfront a tends to produce a bigger impact on your cash flow than simply getting an early payout on a 30-day net invoice or other short-term invoices.

Because invoice factoring is based on sales you’ve already made or contracts you’ve already delivered on, it requires less paperwork and far less processing time than traditional loans. There is also no commitment to pay anything on your part once you've completed your factoring agreement.

We can typically secure invoice factoring for your company within two to three business days. Since the factoring amount is secured by the invoice itself, you won’t have to pledge any additional collateral, either.

A factoring company that offers invoice factoring will investigate a few key details, which include your customers’ business credit history, the total value of the invoices put up for factoring, your business’ sales volume, and whether or not they’ll ultimately be liable and responsible for unpaid balances.

Since it’s your customers’ creditworthiness being considered rather than yours or your company’s, invoice factoring tends to produce better outcomes if your customers are larger and more well-established companies. This is one of two business financing options we offer that places more importance on your customers’ creditworthiness than your own, the other being purchase order financing.

If final liability for unpaid invoices falls to the factoring company, it’s called nonrecourse factoring and will likely come with smaller payouts.

On the other hand, accepting liability for the invoices with recourse factoring might come with larger payouts, but it’ll also require your business to cover the remaining balance if the factoring company can’t collect what’s due.

Accounts receivable financing, sometimes called invoice financing, is similar to invoice factoring, but with a few key differences.

Instead of effectively purchasing your outstanding invoices or unpaid contracts, invoice financing companies will secure a loan with the invoices, giving you a similar amount of working capital while leaving you in control of the collections process.

Most financing companies view this as a riskier option than invoice factoring, as it takes a key step of the process out of their hands.