Invoice factoring refers to selling your outstanding accounts receivable to a factoring company at a discount. The factoring company will send you a portion of the invoice amount upfront and then take over responsibility for collecting the full amount. Typically, the amount of cash upfront can be as high as 95% of your invoices.
Once the factoring company receives the full invoice amount from your client, they’ll send you the difference, subtracted by their fee. In contrast to the invoice financing structure, your customers will send their repayment straight to the factoring company rather than to you directly.
The amount of the factor fee depends on the factoring company, but usually it is between 1%-6% monthly. The factoring company may charge their fee daily, weekly, or monthly - depending on the type of terms you extend to your customers and how quickly they pay your their outstanding invoices with your business. Overall, the longer it takes for your customer to pay your invoice, the more expensive your fee will be.
