What Is Invoice Factoring?
Invoice factoring is a financing arrangement in which a business sells its outstanding invoices to a third party — the factor — at a discount, in exchange for immediate cash. Ownership of the receivable transfers to the factor, which then collects payment directly from the business's customer.
What invoice factoring is and why it matters
Factoring converts receivables into cash without waiting out payment terms. The factor typically advances 70–90% of the invoice value upfront, collects from the customer when the invoice falls due, and remits the remainder minus its fee — commonly 1–5% of invoice value depending on volume, customer credit quality, and how long collection takes. The defining feature versus invoice financing is the transfer: the factor owns the invoice and deals with your customer directly, which means customers know you're factoring. Arrangements come in two flavors: recourse factoring (you buy back invoices the customer never pays) and non-recourse (the factor absorbs the credit loss, for a higher fee). Factoring suits businesses with creditworthy customers but stretched cash — though the cost is meaningfully higher than most conventional borrowing.
A worked example
A staffing agency has a $50,000 invoice on Net 60 terms but payroll due weekly. It factors the invoice: the factor advances 85% ($42,500) within a day. The customer pays the factor $50,000 on day 58. The factor deducts its 3% fee ($1,500) and remits the remaining $6,000 to the agency. Total received: $48,500 — the agency gave up $1,500 to turn a 60-day receivable into next-day cash.
How firms handle it today
Businesses typically arrange factoring facility-by-facility with specialist providers, submitting invoices for approval and reconciling the factor's advances, collections, and fees against their books — an extra ledger of activity that has to be tracked accurately.
How OCTA relates to invoice factoring
Strong receivables hygiene — clean invoices, documented terms, and visible payment behavior — is what makes invoices financeable in the first place. OCTA keeps that record automatically, and its integrated financing options let businesses access working capital against invoices without a separate application process.
Related terms
FAQ
What's the difference between invoice factoring and invoice financing?
Factoring sells the invoice to the factor, who collects from your customer directly; financing borrows against the invoice while you keep ownership and keep collecting yourself.
How much does invoice factoring cost?
Typically 1–5% of invoice value, depending on volume, how long the customer takes to pay, and whether the arrangement is recourse or non-recourse.
Do customers know when invoices are factored?
Usually yes — the factor collects payment directly, so customers are notified to pay the factor rather than you.