Factoring
Similar to merchant cash advances (MCAs), factoring involves “selling” future cash flows, but the two types of financing are actually quite different.
Factoring is when a business sells its unpaid invoices (accounts receivable) to a financing company (a factor) at a discount in exchange for immediate cash. Factoring may also be called "accounts receivable financing."
How factoring works:
You issue an invoice to a customer (say, $100,000 due in 60 days).
Instead of waiting 60 days, you sell that invoice to a factor for, say, $95,000.
The factor collects the full $100,000 from your customer when it’s due.
The $5,000 difference is their fee (plus possibly more if your customer is slow to pay).
Repayment on factoring debt comes from the customer, not from your business’ cash flow. Factoring debt costs are usually lower than an MCA since the factor has collateral in the form of your invoice. In other words, it’s less risky because it’s secured by assets—your invoices.
Factoring is most often used to cover cash flow gaps that result from long payment cycles, which is common in manufacturing and B2B services.
Financial Glossary
Use Lighter Capital's glossary to understand common terms used in finance and investing, so you can build financial literacy and make informed decisions for your startup.
Factoring
Similar to merchant cash advances (MCAs), factoring involves “selling” future cash flows, but the two types of financing are actually quite different.
Factoring is when a business sells its unpaid invoices (accounts receivable) to a financing company (a factor) at a discount in exchange for immediate cash. Factoring may also be called "accounts receivable financing."
How factoring works:
You issue an invoice to a customer (say, $100,000 due in 60 days).
Instead of waiting 60 days, you sell that invoice to a factor for, say, $95,000.
The factor collects the full $100,000 from your customer when it’s due.
The $5,000 difference is their fee (plus possibly more if your customer is slow to pay).
Repayment on factoring debt comes from the customer, not from your business’ cash flow. Factoring debt costs are usually lower than an MCA since the factor has collateral in the form of your invoice. In other words, it’s less risky because it’s secured by assets—your invoices.
Factoring is most often used to cover cash flow gaps that result from long payment cycles, which is common in manufacturing and B2B services.
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