What is factoring?
A plain-language guide to receivables financing — how it works, what it costs, and where it fits among other ways SMEs fund growth.
Turning unpaid invoices into available cash
Factoring is a financing arrangement in which a business sells its outstanding invoices — its accounts receivable — to a third party, known as a factor, in exchange for an advance of most of the invoice value, typically paid within a day or two of issuing the invoice.
Instead of waiting 30, 60 or 90 days for customers to pay on agreed terms, the business receives the bulk of that value almost immediately. The factor then collects payment directly from the customer when the invoice falls due, and remits the remaining balance to the business, minus a service fee.
The typical factoring process
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Invoice issued
The business delivers goods or services and issues an invoice to its customer under standard payment terms.
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Invoice sold to the factor
A copy of the invoice is submitted to the factoring provider, who verifies it and the underlying transaction.
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Advance paid
The factor advances a large share of the invoice value — commonly in the region of 80–90% — directly to the business.
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Customer pays the factor
On the due date, the customer pays the invoice amount directly to the factor rather than to the original business.
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Balance settled
The factor pays the remaining balance to the business, after deducting its agreed fee.
Common arrangements explained
Full-Service Factoring
The factor handles the full receivables process — financing, credit protection against non-payment, and collections — leaving the business free to focus on operations.
Confidential Factoring
The arrangement is not disclosed to customers; the business continues to manage collections while still receiving early payment on invoices.
Selective Factoring
Only specific invoices or customers are factored, giving businesses flexibility to use the tool where it is most useful.
The benefits factoring is typically used for
Faster access to cash
Liquidity is unlocked without waiting out long customer payment terms.
Protection from bad debt
Full-service arrangements can include credit insurance-style protection against customer default.
Less administrative burden
Outsourcing collections and debtor management can free up internal finance resources.
Financing that scales with sales
Because the advance is tied to invoice volume, available financing tends to grow alongside revenue.
Factoring compared with other financing routes
| Aspect | Factoring | Bank Loan / Credit Line |
|---|---|---|
| Primary basis for approval | Creditworthiness of customers | Creditworthiness of the business and collateral |
| Speed of access to funds | Often within days of invoicing | Typically weeks, subject to underwriting |
| Effect on balance sheet | Converts receivables to cash; not classified as new debt in many structures | Recorded as a liability |
| Scales with | Sales volume and invoice value | Fixed facility limit, periodically reviewed |
| Typical cost driver | Service and financing fee on invoice value | Interest rate on outstanding balance |
This comparison is intended to illustrate general, commonly cited differences and is not exhaustive. Terms vary widely by provider, jurisdiction and individual agreement.
This page is provided for general informational purposes only and does not constitute financial, legal or tax advice, nor an offer of any service. A.B.S. Global Factoring AG does not process applications or transactions through this website.