Glossary

Invoice factoring

Selling your unpaid customer invoices to a factoring company for cash now, less a fee, instead of waiting for customers to pay.

Factoring turns receivables into cash within days. The factor buys invoices you have already earned, advances most of their value and collects from your customers. When a customer pays, the factor releases the rest to you, minus its fee.

Your customers are usually notified to pay the factor directly. Under Article 9, once a customer receives that notice, paying you no longer settles the invoice. Approval depends heavily on your customers' credit, which is why factoring can work for a young business with strong commercial customers.

Example: You factor a $40,000 invoice at an 85% advance rate and receive $34,000. The customer pays in full, the factor keeps a 3% fee ($1,200) from the $6,000 reserve and sends you $4,800, so you collect $38,800 in total.

Compare the fee structure, the advance rate and whether the deal is recourse or non-recourse. Try your own figures in the factoring calculator.

Sources

  1. UCC § 9-406. Discharge of account debtor; notification of assignment — Legal Information Institute, Cornell Law School (checked 2026-09-30)

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