Factoring turns receivables into cash within days. The factor buys invoices you have already earned, advances most of their value and collects from your customers. When a customer pays, the factor releases the rest to you, minus its fee.
Your customers are usually notified to pay the factor directly. Under Article 9, once a customer receives that notice, paying you no longer settles the invoice. Approval depends heavily on your customers' credit, which is why factoring can work for a young business with strong commercial customers.
Example: You factor a $40,000 invoice at an 85% advance rate and receive $34,000. The customer pays in full, the factor keeps a 3% fee ($1,200) from the $6,000 reserve and sends you $4,800, so you collect $38,800 in total.
Compare the fee structure, the advance rate and whether the deal is recourse or non-recourse. Try your own figures in the factoring calculator.
Sources
- UCC § 9-406. Discharge of account debtor; notification of assignment — Legal Information Institute, Cornell Law School (checked 2026-09-30)