Selling an invoice can bring cash forward, but fees and nonpayment terms matter.
What it is
Invoice factoring generally means selling eligible unpaid customer invoices to a factor at a discount. It differs from borrowing against invoices while keeping them as collateral. Confirm the actual structure rather than treating “factoring” and “invoice financing” as interchangeable.
How it works
A factor reviews invoices and customers, advances an agreed portion, and handles settlement under the agreement. The factor may collect from customers directly. A reserve is an amount held back until settlement; its release and any deductions depend on the contract.
A business compares receiving less cash earlier with waiting for its customer. It asks what would happen if the invoice were disputed, not just if payment arrived on time.
When it may fit
A business with completed work, eligible business-to-business invoices, and a timing gap before reliable customers pay may explore it. It does not solve a lack of sales, disputed work, or invoices that a factor will not accept.
What providers may review
Review may include customer credit, invoice age and validity, disputes, concentration in a few customers, existing liens, and documentation of completed work. Confirm whether existing financing limits the ability to sell or pledge the invoices.
Costs, repayment & risks
Fees may increase with the time an invoice remains unpaid. Under recourse arrangements, the business may need to repurchase or replace an unpaid invoice; nonrecourse protection can be limited to specified events. Customer notification, collections, minimum volume, termination fees, and guarantees also matter.
Questions to ask
- Who tells and collects from the customer?
- When does the fee increase and the reserve get released?
- Who bears a dispute, late payment, or customer failure?
- Are there minimum volumes, liens, or exit charges?
Compare any proposal with the cost guide and cash-flow walkthrough before deciding.
Sources & further reading
- FundThrough: Invoice factoring mechanics (provider example, not a Cornerstone partner claim)
- OCC: Accounts receivable and inventory financing
General education, not an offer or individual financial, tax, or legal advice. Educational coverage does not establish provider availability or affiliation.
