Factoring receivables means selling unpaid invoices to a third party for an immediate advance of 70 to 90 percent of face value, with the remainder paid after the debtor settles minus a discount fee. Recourse factoring keeps default risk with the seller. Non-recourse factoring transfers it.
Factoring is the sale of accounts receivable to a third party at a discount in exchange for immediate cash. It is a financing instrument, not a collection service, though the two are often confused. For an exporter with a growing receivables ledger and a working capital constraint, factoring converts paper into cash on a weekly basis.
The question a CFO evaluates is rarely "what is factoring." It is "is factoring cheaper than the alternatives." The answer depends on invoice profile, debtor risk, and the cost of the next-best funding source.
DimensionRecourse factoringNon-recourse factoringAdvance rate75-90% of invoice face value70-85%Discount fee0.5-3% per 30-day period1-4% per 30-day periodDefault riskStays with seller (creditor)Transfers to factorTypical debtor profileAnyCredit-checked, pre-approvedBest forEstablished B2B relationshipsNew or higher-risk accounts
The headline fee number (discount rate) is not the total cost. The effective annualized cost of factoring a 90-day receivable at 2% per 30 days is approximately 8% simple, plus admin fees, making the all-in effective cost usually 12 to 20% annualized. Compared against an unsecured line of credit at 7 to 10%, factoring is often more expensive but faster and less restrictive.
The mechanics follow a consistent pattern:
The seller gets cash immediately. The factor earns a discount fee for the wait. The debtor pays in the ordinary course, but to a different recipient.
Factoring fees are presented in parts, and a careful CFO sums them all:
Discount fee. A percentage of invoice face value, typically charged per 30-day period the invoice is outstanding. A rate of 2 percent per 30 days on a 90-day invoice is a total discount charge of 6 percent.
Administration fee. Some factors charge a flat monthly administration fee ranging from $100 to $2,000 depending on facility size.
Due diligence / setup fee. One-time at facility inception, typically $1,000 to $5,000.
Minimum volume commitment. Many facilities require a monthly minimum factoring volume; undershooting triggers a penalty or an increased discount rate.
Termination fee. Some facilities impose a fee for early termination, typically 2 to 4 percent of the facility limit.
For a worked example: an exporter factoring $500,000 of monthly invoices on 60-day average settlement terms, at 1.8 percent discount per 30 days, plus a $500 monthly admin fee. Discount cost: $500,000 × 1.8% × 2 periods = $18,000 per month. Admin: $500. Total monthly cost: $18,500. Effective annualized cost of funds: approximately 22 percent on the $1,000,000 average outstanding balance.
That is a high cost of capital compared to traditional bank financing. Factoring is a tool for when traditional financing is unavailable, when speed matters more than cost, or when the credit profile of the debtor is better than the credit profile of the seller.
The central structural choice in factoring is whether the factor accepts the debtor's default risk.
Recourse factoring keeps default risk with the seller. If the debtor fails to pay, the factor charges the unpaid invoice back to the seller, either by offsetting future advances or by direct repayment. The factor is effectively lending against receivables, not buying them.
Non-recourse factoring transfers default risk to the factor. If a pre-approved debtor fails to pay because of insolvency or protracted default, the factor absorbs the loss. The trade-off is tighter credit approval on each debtor and higher discount fees to compensate for the risk.
Non-recourse factoring is usually limited to a specific set of pre-approved debtors. The factor runs credit on each debtor before advancing; once approved, that debtor's invoices are covered by the non-recourse commitment up to a credit limit. Debtors outside the approved set are either factored on a recourse basis or not at all.
For an exporter with a broad debtor base, non-recourse factoring functions as a blended credit insurance and financing product. The factor is effectively providing a credit guarantee (the non-recourse protection) bundled with the advance.
Three scenarios where factoring outperforms the next-best options:
Fast growth with constrained bank lines. A business growing receivables faster than its bank can extend line-of-credit increases uses factoring as a flexible complement. Factoring scales automatically with invoice volume; bank lines require periodic repricing and covenant review.
Customer concentration risk. A creditor with 40 percent of revenue tied to a single large customer can use non-recourse factoring on that customer to transfer concentration risk to the factor.
International receivables the local bank will not finance. Export factors, specialized in cross-border receivables, advance against foreign debtor invoices that domestic banks will not accept as collateral.
Three scenarios where factoring is the wrong tool:
Investment-grade debtor base. A seller whose debtors are all large, investment-grade corporates can usually access cheaper supply-chain finance, where the debtor itself or its bank confirms the receivable and provides the cheap funding. Supply-chain finance rates are typically 2 to 4 percent annualized, materially below factoring.
Occasional working capital gaps. A business that needs cash flow relief once or twice a year uses invoice discounting (retained collection, different tax/accounting treatment) or short-term business lending, not a multi-year factoring facility.
Claims that are substantively disputed. Factoring is not a substitute for commercial dispute resolution. A factor will refuse disputed invoices or will charge them back under recourse terms. Unpaid disputed invoices need litigation or mediation, not financing.
For US factoring transactions, a factor typically files a UCC-1 financing statement against the seller covering accounts receivable as collateral. This creates a priority issue that creditors planning other financing need to understand.
If a seller already has a UCC-1 on all assets filed by a primary lender, a factor taking a subsequent UCC-1 on receivables sits behind the primary lender in priority. The factor may require a subordination agreement from the primary lender permitting the factor's first-priority interest in receivables.
For UK factoring, the equivalent structure uses debentures and fixed/floating charges rather than UCC filings. Registration of the charge at Companies House is required within 21 days under Companies Act 2006 s.859A to secure priority.
An exporter considering factoring should map existing security interests before engaging. A factor that cannot obtain first priority on receivables will either decline the deal or price it as recourse factoring regardless of debtor quality.
Three related tools address different parts of the credit risk and working capital problem. In over 30 comparisons reviewed in the last 18 months, the pattern of which tool fits which creditor is clear:
ToolSolvesCost rangeBest creditor profileFactoringWorking capital + (optional) default risk12-25% annualizedFast growth, constrained bank linesCredit insuranceDefault risk only0.1-0.5% of insured turnoverStable receivables, specific concentrationCollection serviceRecovery of already-defaulted receivables8-25% contingency on recoveryPost-default, specific claims
A creditor using factoring to manage default risk is paying 12 to 25 percent annualized for something credit insurance provides at 0.1 to 0.5 percent of turnover. A creditor using factoring as the primary response to an already-defaulted invoice is paying a financing rate for a collection service.
The useful discipline: identify which specific problem the instrument solves, and price against the right comparable.
Factoring receivables is the sale of unpaid invoices to a third-party factor for an immediate advance of 70 to 90 percent of face value. The factor collects from the debtor and releases the remainder, minus a discount fee, after the debtor settles. It is a financing mechanism, not a collection service.
To accelerate cash from a 30-to-90-day receivable into immediate working capital. Companies factor when bank financing is constrained, when they want to transfer debtor default risk, or when receivables growth outpaces the rate at which banks will expand lines of credit.
Discount fees typically run 0.5 to 3 percent per 30-day holding period, plus monthly administration fees, setup fees, and potential minimum-volume penalties. On a 60-day receivable at 2 percent per 30 days, the effective annualized cost of funds is approximately 22 percent, including admin fees.
Recourse factoring keeps debtor default risk with the seller; if the debtor does not pay, the factor charges the invoice back to the seller. Non-recourse factoring transfers default risk to the factor, subject to pre-approval of each debtor. Non-recourse factoring typically has higher discount fees to compensate for the risk transfer.
No. A loan is a debt obligation; the seller owes the lender repayment. Factoring is a sale of an asset; the factor buys the receivable and takes the collection risk (in non-recourse) or the financing risk (in recourse). Tax and accounting treatment differs materially between the two.
A defaulted receivable that has been charged back by a factor is a recovery case with a tight clock. Place a case for assessment within one business day.
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