Definition of financial term - Invoice Factoring

What is a factor

It is a company that provides financing by buying unpaid invoices from firms or individuals. These invoices are often called accounts receivables on business balance sheets and are classed as current assets.

This type of financing is principally used to release cashflow.

When you sell an invoice to a factoring company you are effectively selling your invoice or accounts receivable to the chosen firm. In doing this, you give a small percentage of the invoice amount as a fee to the factor.

Factor with or without recourse

The two types of factors offer business financing are:

  • with recourse
  • without recourse.

With recourse requires you as a company to carry the risk that the invoice(s) are not paid within an agreed payment period. The factoring company does not assume this responsibility.

Without recourse means that your factor assumes the risk if invoice(s) are not paid within an agreed payment period. This arrangement involves a higher charge levied by the factor - to allow for risk provision.

Finding factoring companies

Companies offering factoring include:

  • invoice factoring brokers
  • banks
  • building societies.

You can find factors online or by looking in the Yellow Pages.