Glossary

Factoring

By Fredrik Filipsson, cofounder of Business Bank Index
Reviewed by Morten Andersen
Definition

Factoring is a financing arrangement in which a business sells its unpaid invoices to a third party, the factor, for an upfront advance, and the factor then collects payment from the customers.

Information as of 24 June 2026Last reviewed 24 June 2026

General information, not financial, legal, or tax advice. Verify current terms and eligibility with the provider before applying.

Factoring turns unpaid invoices into cash now. A business sells its invoices to a factor, which advances a large share of their value upfront, collects from the customers, then pays the rest minus a fee.

How factoring works

Factoring lets a business raise cash against money it is owed but has not yet collected. The business sells its outstanding invoices to a factoring company, the factor. The factor pays an upfront advance, commonly in the region of 70 to 90 percent of the invoice value, then takes over collecting payment from the business's customers. Once the customers pay, the factor releases the remaining balance to the business, minus its fee. Reported advance rates and fees vary by factor and by the creditworthiness of the customers, as of 24 June 2026.

Recourse and non recourse factoring

In recourse factoring, the most common form, the business remains responsible if a customer does not pay, and must repay the advance on an uncollected invoice. Because the factor carries less risk, recourse arrangements generally cost less. In non recourse factoring, the factor absorbs the loss if an approved customer fails to pay, which shifts that risk away from the business and generally carries a higher fee. The precise terms, including which non payment events are covered, are set in the agreement.

Factoring and invoice financing

Factoring is one form of invoice finance. It usually involves selling the invoices and handing collection to the factor, so customers may deal with the factor directly. Invoice financing more broadly can also include arrangements where the business keeps control of its sales ledger and chases payment itself. The labels are used differently across providers, so confirm who collects, who carries the credit risk, and the full fee structure before signing. See Invoice financing for the wider category.

Frequently asked questions

How does factoring work?
A business sells its unpaid invoices to a factoring company, which pays an upfront advance of part of their value, then collects payment from the customers. Once the customers pay, the factor releases the rest minus its fee. Advance rates and fees vary by provider and by customer credit quality.
What is the difference between recourse and non recourse factoring?
In recourse factoring the business must repay the advance if a customer does not pay, so it keeps the credit risk and usually pays a lower fee. In non recourse factoring the factor absorbs the loss on an approved unpaid invoice, which shifts that risk to the factor and usually carries a higher fee.
What does factoring cost?
Pricing is commonly quoted as a factoring fee on the invoice value plus any service charges, and it depends on volume, invoice size, and the creditworthiness of the customers. Non recourse arrangements generally cost more than recourse. Confirm the full fee schedule with the provider.
Is factoring the same as invoice financing?
Factoring is one type of invoice finance. It typically involves selling the invoices and letting the factor collect from customers, while other invoice financing arrangements let the business keep control of collections. Terms vary by provider, so check who collects and who carries the risk.

Definitions, fees, features, and eligibility change and vary by region. This page was last reviewed on 24 June 2026. Confirm current terms with the provider before applying.

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