Invoice Factoring – A Strategic Finance Solution for B2B

What Is Invoice Factoring?

Invoice factoring, also known simply as factoring or accounts receivable factoring, is a form of debtor finance in which businesses sell outstanding invoices to a third party—known as a factor—at a discount. This allows companies to convert tied‑up receivables into immediate cash, addressing working capital constraints and accelerating cash flow.

By transferring ownership and collection responsibility of the invoice to the factor, businesses unlock liquidity often tied up in 30–90-day payment cycles. This is particularly valuable to small and medium enterprises (SMEs) that need quick access to cash to meet payroll, reinvest in inventory, or fund new orders.

How Invoice Factoring Works

Here’s a step‑by‑step overview of a typical invoice factoring transaction:

1. Eligibility assessment & onboarding
   The business submits key financial details- corporate KYC, buyer list, and aging receivables report—for underwriting. The factor evaluates creditworthiness based on the customer’s payment history.

2. Invoice submission
   Approved invoices are submitted via the factor’s platform. The transaction is usually immediate and automated.

3. Upfront advance
   The factor disburses an advance—typically 80‑90% of the invoice amount—into the seller’s account within 24–48 hours.

4. Invoice collection
   The factor collects payment directly from the customer on the invoice due date.

5. Final settlement
   Once payment is received, the factor remits the remaining balance to the seller minus fees (discount, factoring, and possible reserve deductions).

This arrangement provides quick cash flow, leaving the seller to focus on core business operations.

Key Terminology

To better navigate invoice factoring, here are the essential terms:

• Discount rate (factoring fee): The fee charged for facilitating the advance, typically expressed as a percentage of the invoice value.

• Advance rate: The initial advance percentage, commonly 80–90%, is paid to the seller against the invoice.

• Reserve: The withheld balance (10–20%) is held until the customer pays.

• Recourse vs. Non‑recourse:

  • Recourse factoring allows the factor to recover unpaid amounts from the seller.

  • Non‑recourse factoring shifts payment risk to the factor, protecting the seller if the customer defaults.

Beneficial Scenarios for Businesses

Invoice factoring is ideal for firms that:

• Offer credit terms of 30–90 days and require rapid cash flow to sustain operations.

• Aim to scale by handling larger orders or topping up stock levels without taking on debt.

• Prefer to outsource collections and reduce administrative burden.

Types of Invoice Factoring

Invoice factoring comes in various forms, based on business priorities:

• Disclosed vs. Undisclosed:

  • Disclosed: Customers are informed when factoring takes place.

  • Undisclosed: Customers remain unaware; the seller retains control over collections.

• Domestic vs. Export:

  • Domestic factoring occurs within the same country.

  • Export factoring involves cross-border transactions and sometimes an additional foreign factor.

• Maturity factoring: Payment is released only once the invoice reaches its due date.

• Advance factoring: Immediate advance is provided upon factoring.

• Reverse factoring (supply‑chain finance): Innovative arrangement initiated by the buyer. The buyer arranges financing for the supplier’s invoices, often at a lower cost due to a stronger buyer credit rating.

Pros & Cons of Invoice Factoring

Advantages

• Stable cash flow: Rapid access to 80–90% of your funds within days.

• Balance sheet impact: Viewed as an asset sale, not a loan—does not increase liabilities.

• Scalable and flexible: Factor select invoices as needed—no long-term, inflexible borrowing commitment.

Disadvantages

• Costlier than loans: Fees and rates may exceed conventional lending rates.

• Customer perception: Disclosed factoring can impact client relations if poorly managed.

• Credit constraints: Funding is limited by customer creditworthiness; approval processes may delay large invoice approval.

Invoice Factoring in Export Finance

Invoice factoring plays a notable role in international trade:

• Exporters often face long credit cycles and currency risks. Export factoring helps transform distant receivables into immediate capital.

• Forfaiting, a variant of export factoring, involves medium- to long-term financial instruments and larger-ticket transactions.

• Cross-border factors may collaborate to facilitate multi-currency settlements and conduct local collection under export factoring agreements.

Conclusion

Invoice factoring transforms receivables into working capital, bridging cash flow gaps, protecting against defaults (non‑recourse), and offering flexible financing. While costs are higher than traditional loans, the benefits in speed, flexibility, and scalability make it especially advantageous for SMEs.