Managing cash flow is one of the most critical parts of running a successful business. Even if you're closing big deals and sending out invoices regularly, a delay in payments from customers can severely impact your day-to-day operations. That’s where factoring accounts receivable comes in—a smart way to turn unpaid invoices into immediate working capital.
In this complete guide, you’ll learn everything about factoring and accounts receivable, how it works, when to use it, the benefits and drawbacks, key terms to know, and how it compares to other financing options. We’ll also break down the difference between factoring and accounts receivable financing, share common use cases, and provide a simple formula to understand the cost structure.
Factoring accounts receivable is a financial transaction where a business sells its unpaid invoices to a third-party (called a "factor") in exchange for immediate cash. Instead of waiting for 30, 60, or even 90 days for your clients to pay, factoring lets you unlock capital tied up in your receivables.
You can typically receive 70% to 90% of the invoice amount up front. Once the customer pays, the factor sends you the remaining balance minus their fees.
This approach is ideal for businesses with regular invoicing but long payment terms or inconsistent cash inflows.
Let’s break down how factoring and accounts receivable work in real-time business scenarios:
Your company delivers goods or services and sends an invoice to the customer with standard payment terms (Net 30, Net 60, etc.).
Instead of waiting, you send the unpaid invoice to a factoring company. The factor evaluates the invoice and the creditworthiness of your customer.
Once approved, the factor provides you with an immediate cash advance—typically around 80% to 90% of the total invoice value.
The customer pays the invoice directly to the factoring company as per usual payment terms.
After receiving full payment, the factor sends the remaining balance to your business, minus a small service fee known as the factoring fee.
This makes accounts receivable factoring a fast and reliable way to convert receivables into usable funds without waiting on delayed client payments.
With recourse factoring, if your customer fails to pay the invoice, your business is responsible for repaying the advance to the factoring company. It’s the most common and affordable option.
In non-recourse factoring, the factor assumes the credit risk. If the client doesn’t pay, you’re not held liable. This offers added protection but typically comes with higher fees and stricter approval requirements.
Knowing which type suits your business helps avoid unexpected obligations and gives you more control over your cash flow strategy.
Let’s look at how to calculate what you’ll receive from factoring:
Advance Amount = Invoice Value × Advance Rate
Factoring Fee = Invoice Value × Fee Rate
Remaining Payment = Invoice Value – Advance – Factoring Fee
So, your total cash from the transaction is $19,400 (with $600 retained as the factor's profit).
This transparent formula helps you understand the cost of using factoring in accounts receivable and supports better decision-making.
These two terms are often used interchangeably, but they’re distinct in structure and impact:
|
Feature |
Factoring |
Accounts Receivable Financing |
|
Nature |
Asset sale |
Short-term loan |
|
Responsibility for Collection |
Factor collects |
You collect |
|
Who Owns the Invoice |
Factor |
You |
|
Visibility to Customers |
Customers pay factor |
Customers pay you |
|
Liability |
No new debt |
Treated as a liability |
|
Credit Focus |
Based on your client’s credit |
Based on your business credit |
So, what’s the difference between factoring and accounts receivable financing? Factoring transfers responsibility and risk to the factor, while AR financing retains the invoice under your ownership as collateral for a loan.
Many businesses turn to accounts receivable financing vs factoring when comparing options. Here's why factoring stands out:
You don't have to wait 30–90 days to get paid. With factoring, cash is typically delivered in 1–2 business days.
It’s not a loan. You’re not adding liabilities or interest payments to your balance sheet.
Approval relies on your customer’s ability to pay—not your credit score.
If your business is growing but your cash flow can't keep up, factoring helps fund expansion without waiting on receivables.
The more you invoice, the more funding you can receive—no need to renegotiate limits like with traditional credit lines.
These benefits of factoring accounts receivable make it a versatile solution across industries and business sizes.
Typical Accounts Receivable Factoring Rates
Factoring fees vary by provider and risk factors. On average:
Factors that affect accounts receivable factoring rates:
Always read the full agreement before signing—some providers add admin fees, processing costs, or hidden charges.
Using factoring and accounts receivable is ideal when:
Startups and fast-growing firms often use factoring to bridge funding gaps between invoice creation and payment collection.
While factoring is useful, it might not be the best fit if:
In such cases, reviewing accounts receivable financing vs factoring can help you choose the right strategy.
Before you reach the point of needing factoring, the best solution is a solid foundation. That’s where Basil comes in—a purpose-built accounting practice management software that helps accountants and firms stay organized, bill accurately, and get paid faster.
With Basil, you gain full visibility into your receivables, deadlines, and client communications—so your accounts receivable never spiral out of control.
And the best part? Basil offers all of this for just $30 per user/month, with no hidden fees or paywalls.
Learn more or start your 15-day free trial at- coraltreetech.com/basil
No. It’s not a loan. You sell your receivables at a discount for cash. There’s no debt or interest payments involved.
Typically within 24–48 hours. Once the factor verifies the invoice and client, funds are deposited quickly.
Accounts receivable factoring rates vary but usually fall between 1%–5% of the invoice value per 30 days. Rates depend on industry, client credit, volume, and payment terms.
Yes. In most cases, the client is notified and instructed to pay the factoring company directly. This is standard practice in factoring agreements.
Absolutely. Using a system like Basil helps you keep clean records, track invoice timelines, and ensure everything is organized—making the factoring process faster and more transparent.
Factoring accounts receivable is a flexible financing strategy that offers immediate access to capital by selling unpaid invoices. It’s ideal for businesses facing cash flow challenges due to slow-paying clients or long payment terms.
While factoring isn’t for every situation, it’s a valuable tool when used strategically. That said, strong internal systems are your first line of defense—and that’s where Basil shines.
By using Basil’s accounting practice management software, you’ll gain better control of your receivables, reduce payment delays, and improve financial visibility—so you can grow confidently with or without factoring.
Ready to strengthen your AR process before factoring becomes a need?
Try Basil for free today. Start your 15-day trial