Invoice Factoring
Invoice factoring is a financing product where a business sells outstanding invoices to a factor at a discount — receiving immediate cash for accounts receivable rather than waiting 30-90 days for customer payment — a complementary alternative to MCA for B2B businesses with strong receivables.
Why This Matters
Factoring serves B2B businesses with creditworthy customers and slow payment cycles. Unlike MCA where repayment comes from merchant revenue, factoring repayment comes directly from the underlying customer paying the original invoice. This makes factoring underwriting focus on the invoiced customer's credit (not the selling business), often allowing factoring approval where MCA would decline. Factoring fees typically run 1-5% per 30-day period (effectively 12-60% annualized). Two structures exist: recourse (selling business reimburses factor if customer doesn't pay) and non-recourse (factor takes credit risk on customer non-payment).
Example
Construction subcontractor invoices general contractor $50K with 60-day payment terms. Sells invoice to factor at 95% face value: receives $47,500 immediately. Factor collects $50K from general contractor at 60-day mark. Factor's gross margin: $2,500 over 60 days (~30% APR). Subcontractor accelerates cash flow without taking on debt obligation.
Frequently Asked Questions
Frequently Asked Questions
How does factoring compare to MCA for B2B businesses?
Factoring is typically cheaper for businesses with creditworthy customers and clean A/R aging. MCA is typically faster to fund and has fewer eligibility requirements but higher cost of capital. Factoring works for established B2B operations; MCA serves a broader merchant base including B2C and newer businesses.
What's the difference between recourse and non-recourse factoring?
Recourse: selling business reimburses factor if customer doesn't pay (lower factoring fees, business retains credit risk). Non-recourse: factor accepts customer non-payment risk (higher fees, business is fully off-risk on customer credit). Most small business factoring is recourse-based.