Definition
Selling unpaid invoices to a factor for an immediate advance.
Why it matters
The factor collects from customers and remits the reserve minus fees.
Where it shows up in a deal
Factoring runs as a short repeatable loop once onboarding is done: submit a schedule of accounts with proof of delivery, the factor verifies with your customer, the advance is sent by ACH or wire, and the reserve is released after the customer pays. The paperwork that sets it up is a sale of accounts, not a loan.
What it affects
- The factor's credit decision is about your customers, which is why young companies qualify.
- Because it is a sale, no term debt is created - though the UCC filing is still public.
- Fees accrue for as long as the invoice is outstanding, so slow buyers cost you, not the factor.
- Add-on charges - wires, lockbox, minimums, termination - frequently matter more than the headline rate.
A worked example
A $47,500 invoice at a 93% advance and 1.6% per 30 days, prorated daily, paid on day 38: the advance is $44,175 and the reserve $3,325. The fee is $47,500 x 1.6% x 38/30 = $963, so $2,362 of reserve releases and you receive $46,537.
The common mistake
Related terms
- FactorA company that buys invoices from businesses at a discount.
- Advance RateThe percentage of an invoice's value a funder pays upfront.
- ReserveThe portion of an invoice held back by a factor until the customer pays.
- Notice of AssignmentA letter telling customers to pay the factor instead of the business.
Questions about how invoice factoring affects your facility?
Call (929) 658-8087 or request a written quote — no obligation, no credit impact.
