What Is Accounts Receivable Factoring

Accounts receivable factoring, also known simply as invoice factoring, is a financial transaction in which a business sells its outstanding invoices (accounts receivable) to a third-party company, called a factoring company or factor, at a discount in exchange for immediate cash. Instead of waiting 30, 60, or even 90 days for customers to pay their invoices, the business receives most of the invoice value upfront, typically 70% to 90%, from the factoring company. The factor then collects the full payment directly from the customer. Once the customer pays, the remaining balance, minus the factor’s fee, is remitted to the business. 

This process helps companies maintain steady cash flow, cover operational expenses, and invest in growth without taking on traditional debt. The global factoring services market was estimated at USD 4,077.9 billion in 2024 and is projected to reach USD 6,585.4 billion by 2033, exhibiting a CAGR of 5.44% during 2025–2033. This growth reflects the increasing reliance of businesses on factoring to manage cash flow efficiently. 

Accounts receivable factoring is especially valuable for businesses with long payment cycles or cash flow gaps, such as manufacturers, logistics providers, or service-based companies that rely on large client accounts. Unlike loans, factoring is based on the creditworthiness of a company’s customers rather than the business itself, making it a flexible and accessible form of financing for small and mid-sized enterprises that need working capital to keep their operations running smoothly.

How Does Accounts Receivable Factoring Work

Accounts receivable factoring works through a simple process that converts unpaid invoices into immediate cash. Here’s how it typically works, step by step:

• Step 1: Invoice Creation – The business provides goods or services to its customers and issues invoices with standard payment terms (e.g., 30, 60, or 90 days).
• Step 2: Selling Invoices to a Factor – Instead of waiting for payment, the business sells these unpaid invoices to a factoring company at a discount.
• Step 3: Advance Payment – The factoring company immediately pays the business a large portion of the invoice value, usually between 70% and 90%.
• Step 4: Customer Payment Collection – The factoring company takes over the responsibility of collecting payment from the customer.
• Step 5: Remaining Balance Settlement – Once the customer pays in full, the factor deducts its service fee and releases the remaining balance to the business.

This straightforward process helps businesses maintain healthy cash flow, avoid borrowing, and focus on growth instead of chasing late payments.

Why Businesses Use Accounts Receivable Factoring

The main reasons why businesses choose factoring are:

• Improved Cash Flow – Converts unpaid invoices into immediate cash to cover daily expenses, payroll, and supplies.
• Faster Access to Working Capital – Provides quick funding without waiting for customers to pay, often within 24–48 hours.
• No New Debt – Unlike loans, factoring doesn’t create debt; it simply unlocks cash tied up in receivables.
• Easier Qualification – Approval is based on customer creditworthiness rather than the business’s financial history, making it ideal for small or growing companies.
• Outsourced Collections – The factoring company handles payment collection, saving time and resources.
• Supports Business Growth – Steady cash flow enables businesses to take on new clients, larger projects, or expand operations without financial strain.
• Protects Against Late Payments – Helps mitigate cash flow disruptions caused by delayed or inconsistent customer payments.

How to Calculate AR Factoring

The calculation is based on three key elements: the invoice amount, the advance rate, and the factoring fee (or discount rate).

Here’s how to calculate AR factoring step by step:

1. Determine the total invoice value.
   This is the amount your customer owes. For example, let’s say your invoice is worth $10,000.
2. Apply the advance rate.
   Factoring companies typically advance 70%–90% of the invoice value upfront. If the advance rate is 85%, you’ll receive:
   $10,000 × 0.85 = $8,500 upfront.
3. Subtract the factoring fee.
   The factoring fee (also called the discount rate) usually ranges from 1% to 5% of the invoice value, depending on factors like customer credit risk or payment terms. If the factoring fee is 3%, that’s $10,000 × 0.03 = $300.
4. Calculate the remaining payment.
   Once the customer pays the invoice, the factoring company releases the remaining balance minus the fee:
   Remaining payment = $10,000 – $8,500 (advance) – $300 (fee) = $1,200.
5. Total amount received:
   $8,500 (initial advance) + $1,200 (remaining payment) = $9,700.

So, in this example, your business receives $9,700 in total, and the factoring company keeps $300 as its fee.

The formula is:

Total Received = (Invoice Value × Advance Rate) + [(Invoice Value – Fee) – Advance Payment]

Accounts receivable factoring calculations help businesses evaluate whether the immediate access to cash outweighs the small percentage paid in fees.