Invoice factoring, and when it beats a loan
If other businesses owe you money, you may not need to borrow at all. What factoring is, how the cost is built, and the one clause that decides whether your customers ever find out.
Plenty of businesses that look short of cash are not short of money. They are short of money that has arrived. The work is done, the invoice is out, and the customer pays on sixty day terms.
Factoring exists for exactly that gap, and it behaves differently from every other product on this site, because it is not borrowing.
How it actually works
You sell an unpaid invoice to a factor at a discount. They advance most of the value now, collect from your customer later, and pay you the rest minus their fee.
- You invoice your customerThe work is complete and the invoice is issued on normal terms.
- The factor advances most of itA large share of the face value, usually within a day or two of approval.
- Your customer pays the invoiceOn their original terms, to whoever the agreement specifies.
- The factor releases the restThe remaining balance, minus their fee.
You are not borrowing against the invoice. You are selling it, which is why it does not show up as debt.
Why approval can be easier
The factor is taking on your customer's payment behaviour as much as your own. A young business invoicing a large, reliable customer can sometimes factor when it could not borrow.
You invoice established businesses or public bodies on terms, and they pay reliably, if slowly.
You sell to consumers, take payment at the point of sale, or invoice one customer who pays erratically.
How the cost is built
Factoring is usually priced as a fee that grows with time outstanding, rather than a single rate. That makes it cheap on a fast-paying invoice and expensive on a slow one.
Ask for the total cost in dollars at thirty, sixty and ninety days. A provider who will not put that in writing is telling you something.
- The advance rateWhat share of the invoice arrives up front.
- The fee, in dollars, at 30, 60 and 90 daysNot a percentage per period. Dollars.
- Every additional chargeSet-up, minimums, wire fees, monthly minimums and termination terms.
- What happens if the invoice is disputedDisputes usually pause everything and can unwind the advance.
The two clauses that matter
Almost every disappointing factoring arrangement comes down to one of these two, agreed without being understood.
Recourse and non-recourse are the industry terms. Notification and non-notification describe whether your customer is told.
When it beats borrowing
Factoring wins when the problem is timing rather than profitability. If the work is done and the margin is there, converting an invoice to cash is usually cheaper and cleaner than adding a daily debit on top of a business that is already fine.
Growth is the cause of the squeeze. More orders means more cash tied up in work already delivered.
The business is loss-making. Factoring accelerates cash, it does not fix margins, and it will run out of invoices.
General information, not financial or legal advice. Factoring structures, advance rates, fees and notification practices vary considerably by provider and industry. Cashman Sam is not a bank, a lender or a broker of record, and is compensated by funding partners when a deal completes. Review your own agreement before signing.
