Accounts receivable factoring, commonly known as invoice discounting, turns unpaid invoices into fast cash. Instead of waiting 30, 60, or 90 days, a business sells its receivables to a factor at a discount and receives an upfront advance — often 70% to 90% of the invoice value. The factor then collects from the customer and remits the balance, minus fees.
This approach helps smooth liquidity because cash arrives sooner, so payroll, inventory, and growth projects don’t stall.
How Does Accounts Receivable Factoring Work?
Accounts receivable factoring starts once goods or services are delivered and an invoice is issued. The business submits selected invoices to the factor, who assesses the creditworthiness of the end customer, sets the advance rate, and pays the initial amount. When the customer pays the invoice in full, the remaining funds flow back to the business after the factor’s charge.
Because approval hinges on the customer’s ability to pay, not just the business’s balance sheet, factoring can be faster to set up than a traditional loan. It is especially useful when payment terms are long, sales are seasonal, or a growth phase demands extra working capital.
Benefits of Accounts Receivable Factoring
AR factoring offers both financial and operational advantages:
Faster liquidity
Cash is unlocked from invoices quickly, so payroll, inventory purchases, and growth projects proceed without delay.
No new balance sheet debt
Funding arrives via receivable sales, not loan obligations, which helps preserve lending capacity.
Scalable financing
Access to funds expands with sales volume because more invoices create more eligible collateral.
Improved cash flow predictability
Shorter cash conversion cycles stabilise planning, so treasury teams forecast with greater confidence.
Potentially lower collections workload
Where the factor manages collections, internal teams spend less time on routine chasing and dispute follow ups.
Support during volatility
Extended terms or customer side delays become less disruptive because cash arrives upfront.
When does accounts receivable factoring make sense?
Accounts receivable factoring is often useful when payment cycles are long, but expenses are immediate. It can also support seasonal demand, rapid growth, or unexpected cost increases. Since factoring aligns cash flow with sales activity, it provides flexibility without relying solely on credit.
However, factoring works best when invoicing is accurate and consistent. Clean invoice data and clear customer terms reduce delays and improve outcomes.
The Bottom Line
Accounts receivable factoring can help turn unpaid invoices into immediate working capital as well as gain flexibility without waiting for customers to settle their accounts. This can ease pressure on day-to-day operations, support growth, and reduce the risk that late payments disrupt financial stability.
When these foundations are in place, accounts receivable factoring becomes more than a short-term fix. It becomes a strategic tool that helps align cash inflows with business needs, while maintaining healthy customer relationships and predictable financial performance.