Factoring is the purchase or assignment of accounts receivable by a factor, often combining earlier cash, collection services, and agreement-specific credit protection.
Factoring is an arrangement in which a business sells or assigns accounts receivable to a finance provider called a factor. The factor may provide cash before customers pay, administer the sales ledger, collect invoices, and assume specified customer credit risk.
Factoring does not always transfer every risk. Recourse factoring allows the factor to require repayment or replacement when covered receivables are not collected. Non-recourse factoring transfers defined credit risk, but exclusions for disputes, returns, fraud, contractual nonperformance, or breached warranties may remain with the seller.
Not every arrangement uses an advance. In maturity factoring, payment may occur on an agreed maturity date rather than immediately after invoice purchase.
| Structure | Who bears covered customer credit loss? | Who usually collects? | Important limitation |
|---|---|---|---|
| Recourse factoring | Seller | Factor or seller | Seller may have to repurchase or replace unpaid receivables |
| Non-recourse factoring | Factor for contractually covered risks | Usually factor | Disputes, dilution, fraud, and seller warranties may be excluded |
| Disclosed factoring | Depends on recourse | Customer is notified to pay factor or controlled account | Customer communication can affect the commercial relationship |
| Confidential factoring | Depends on recourse | Seller may collect as agent | Cash control and disclosure can change after trigger events |
| Maturity factoring | Depends on recourse and protection terms | Often factor | Service and credit protection may matter more than an initial advance |
Labels overlap across jurisdictions and providers. The receivables purchase agreement, servicing terms, notices, and recourse provisions control the analysis.
Assume a factor accepts a $200,000 invoice pool under these illustrative terms:
The initial advance is:
Customers pay $194,000 after the $6,000 of valid credits. The factor’s simplified final settlement is:
The business receives total cash of $190,000: the $160,000 advance plus the $30,000 settlement. The $10,000 difference from invoice face value consists of $6,000 of customer credits and a $4,000 fee.
This is not a universal pricing model. Agreements can add interest-like discount charges, minimum fees, reserves, audit costs, concentration adjustments, recourse claims, or delayed settlement.
The most important question is not simply whether the contract says “non-recourse.” Review which events the factor actually assumes.
| Event | Often treated as | Why contract review matters |
|---|---|---|
| Customer insolvency | Potential covered credit risk in non-recourse factoring | Coverage may apply only to approved customers and limits |
| Product return or price dispute | Seller dilution risk | The receivable may never have been fully collectible |
| Duplicate or fraudulent invoice | Seller breach or fraud risk | Factors generally rely on invoice representations |
| Failure to deliver goods or services | Seller performance risk | Customer may have a valid defense or offset |
| Currency or country restriction | Separate political, transfer, or foreign-exchange risk | Domestic and export factoring terms differ |
| Late payment without default | Timing risk | Fees and reserve periods can continue while payment is delayed |
| Structure | Primary form | Collection role | Typical receivable profile |
|---|---|---|---|
| Accounts Receivable Financing | Secured loan | Borrower usually collects | Revolving short-term business receivables |
| Factoring | Receivables purchase or assignment | Factor often collects | Short-term invoices, sometimes on an ongoing basis |
| Invoice Discounting | Invoice-backed finance or assignment | Business generally retains collection | Revolving business-to-business invoices |
| Forfaiting | Without-recourse export receivables purchase | Forfaiter collects | Medium- or long-term export obligations |
This page is educational and does not provide accounting, credit, legal, tax, investment, or financing advice.