Invoice Factoring
Definition
Invoice factoring is a financing arrangement where a business sells its outstanding invoices (accounts receivable) to a third-party factor at a discount in exchange for immediate cash. It provides faster access to working capital without taking on traditional debt, typically advancing 80-90 % of invoice value upfront.
Overview
Invoice factoring converts unpaid invoices into immediate cash flow. The process works in three steps: (1) the business sells its outstanding invoices to a factoring company, (2) the factor advances 80–90 % of the invoice value immediately, and (3) when the customer pays the invoice, the factor remits the remaining balance minus a factoring fee (typically 1–5 % of the invoice value).
Factoring differs from a traditional loan because the credit evaluation focuses on the creditworthiness of your customers, not your company. This makes it accessible to startups that may not qualify for bank loans. However, factoring can be expensive on an annualized basis: a 3 % fee on a net-30 invoice equates to roughly 36 % annual interest.
For SaaS companies, factoring is most relevant when dealing with enterprise clients on long payment terms. If a company has $500K in outstanding invoices with 60-day terms, factoring can provide $400K–$450K immediately. This can bridge cash flow gaps without dilutive fundraising, but should be used strategically rather than as a regular financing mechanism.
Example
A startup factors $100K in outstanding invoices. The factor advances 85 % ($85K) immediately and holds 15 %. When the customer pays, the factor returns the remaining $15K minus a 2.5 % fee ($2,500), netting the startup $12,500.
Related Articles
Related Calculators
Track Invoice Factoring and more with culta.ai
Start free and get real-time visibility into the metrics that matter for your startup.