Invoice factoring sells individual invoices or a full ledger to a third-party factor for an immediate advance of 70 to 90 percent of face value. Discount fees run 0.5 to 3 percent per 30-day period. Effective annualized cost is typically 12 to 25 percent. Useful for working capital, expensive for risk transfer.
Invoice factoring is the sale of accounts receivable to a third party at a discount in exchange for immediate cash. It is a working-capital instrument, not a collection service. A B2B creditor that factors its ledger is exchanging future cash (60- to 90-day receivables) for immediate cash, minus a discount fee that compensates the factor for the holding period and the underlying credit risk.
For a CFO evaluating factoring, the real question is almost never "what is factoring." It is "what is the all-in cost, and what is the next-best alternative." This article addresses both.
DimensionTypical rangeAdvance rate70-90% of face valueDiscount fee0.5-3% per 30-day periodAll-in effective APR12-25%Recourse modelSeller retains default riskNon-recourse modelFactor accepts approved debtor default riskSpot factoringSingle invoice, higher feeWhole-ledger factoringOngoing facility, lower feeTypical facility size$100,000 to $50 million
The transaction follows the same sequence in almost every facility:
From the seller's perspective, factoring converts a receivable into cash. From the factor's perspective, factoring is a collateralized advance with receivable quality as the underwriting variable.
Factoring fees are rarely a single headline number. A careful CFO sums all components:
Discount fee. Per 30-day period the invoice is outstanding. A 1.5 percent monthly rate on a 60-day invoice produces a total discount of 3 percent of face value.
Origination or setup fee. One-time at facility inception, typically $1,000 to $5,000 depending on facility size.
Monthly minimum fee. Most facilities require a minimum factored volume per month. Undershooting triggers either a minimum-fee penalty or an elevated discount rate on future invoices.
Administrative fee. Flat monthly charge, typically $100 to $2,000, scaled to facility size.
Credit check fee. Some factors charge per-debtor credit check, typically $10-50 per check.
Reserve release delay. Some factors hold the reserve (the 10-30 percent balance) for additional days beyond debtor payment, generating implicit float on the seller's cash.
Termination fee. Typically 2-4 percent of the facility limit if the seller exits before the minimum term (often 12-24 months).
For a worked example: a seller factoring $2 million per month at 1.8 percent discount per 30 days, on 60-day average payment terms, with a $500 monthly admin fee. Monthly cost: $2 million × 1.8% × 2 periods = $72,000 discount + $500 admin = $72,500. Annualized: $870,000 on an average outstanding balance of $4 million. Effective APR: roughly 22 percent.
That is expensive working capital. It is not a cheap financing source.
Three scenarios where the 22-percent-ish APR is still the right choice:
Growth constrained by working capital. A company growing top-line faster than its bank can grow its line of credit uses factoring as the scalable supplement. Bank lines require periodic repricing, financial covenant testing, and personal guarantees. Factoring scales with invoice volume automatically and typically does not require personal guarantees beyond standard recourse on the receivables themselves.
Customer concentration risk. A company with 50 percent of revenue tied to one customer uses non-recourse factoring on that customer to transfer concentration risk to the factor. The premium over recourse factoring is the effective cost of the credit insurance bundled into the non-recourse product.
Cross-border receivables unfinanced by domestic banks. Export factoring, specialized in foreign debtor invoices, advances against receivables that domestic banks decline. The seller gets international cash flow that bank financing does not address.
A less-discussed structural choice is spot factoring vs whole-ledger factoring.
Whole-ledger factoring commits the entire eligible receivables portfolio to the factor. The seller cannot pick and choose which invoices to factor. Rates are lower because the factor receives predictable volume and can underwrite the full customer book. Typical discount rate: 1.0 to 2.0 percent per 30 days.
Spot factoring (also called single-invoice factoring) allows the seller to choose individual invoices to factor. Rates are higher, typically 2.5 to 4.0 percent per 30 days, because the factor receives adverse selection: sellers tend to spot-factor their worst invoices.
For occasional working capital needs, spot factoring is more flexible but materially more expensive per dollar advanced. For continuous working capital support, whole-ledger factoring is cheaper and operationally simpler.
The break-even is roughly: a seller factoring less than 20 percent of its annual receivables should use spot; a seller factoring more than 50 percent should use whole-ledger; the 20-50 percent range requires case-specific math.
One under-discussed consequence of factoring is the effect on receivables KPIs used by the finance team.
Factored receivables are typically derecognized from the seller's balance sheet under both US GAAP and IFRS, provided the transfer qualifies for sale accounting (most non-recourse factoring does; most recourse factoring does not). This changes DSO meaningfully:
For accurate performance measurement, a factored ledger requires two DSO metrics: all-in (after factoring) and underlying (pre-factoring). Reporting only all-in DSO hides operational problems in the underlying receivables function.
Three adjacent instruments solve overlapping problems. In comparisons across US and UK facilities reviewed over the last 18 months:
InstrumentSolvesTypical costBest forWhole-ledger factoringWorking capital + (option) default risk12-20% APRFast growth, weak bank linesAsset-based lending (ABL)Working capital, keeps collections in-house8-14% APRLarger businesses, prefer controlTrade credit insuranceDefault risk only0.1-0.5% of insured turnoverStable receivables, concentration issuesSpot factoringAd hoc working capital18-30% APRInfrequent need
A creditor using whole-ledger factoring primarily for default risk transfer is paying 15 percent APR for something credit insurance provides at 0.3 percent of turnover. The discipline is matching the instrument to the specific problem.
Depends on the problem being solved. For working capital financing where bank lines are constrained and growth opportunity exceeds the cost of factoring, it is often the right tool. For default risk transfer alone, credit insurance is almost always cheaper. For occasional cash flow gaps, short-term lending or invoice discounting may be better.
Effective annualized cost typically runs 12 to 25 percent of the amount advanced, including discount fees, administrative fees, minimum-volume penalties, and reserve-release float. This is materially above traditional bank financing (7-10 percent) but cheaper than some forms of merchant cash advance.
Yes, factoring is a well-established commercial practice in all major common-law and civil-law jurisdictions. In the US, factoring transactions are typically governed by UCC Article 9 as sales of accounts. In the UK, they operate under the Sale of Goods Act and common-law assignment principles. Some jurisdictions restrict notification requirements or consumer-related factoring, but B2B factoring is generally lawful.
Three primary risks: (1) the debtor dispute risk — if the debtor raises a dispute after advance, the factor may charge back the invoice; (2) relationship risk — notification of assignment can strain debtor relationships; (3) lock-in risk — termination fees on multi-year facilities can exceed the short-term cost of switching to a cheaper instrument.
Factoring is the sale of invoices with the factor taking over collection and (usually) notifying the debtor. Invoice discounting is a loan against invoices as collateral, with the seller retaining collection responsibility and (usually) keeping the arrangement confidential from debtors. Discounting is typically cheaper but requires better seller credit quality.
A factor charge-back on an unresolved invoice is a recovery case with a clock. Place a case for assessment within one business day.
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