--- title: "What Is Invoice Factoring?" url: https://www.uncap.com/glossary/invoice-factoring author: "Denis Dyli" published: 2026-10-28 updated: 2026-10-28 summary: "Invoice factoring is a way for a business to raise cash by selling its unpaid customer invoices, its accounts receivable, to a third party called a factor. The factor advances part of the invoice value, collects payment from the customer, and pays the rest to the seller minus a fee. It is also called accounts receivable factoring." --- # What Is Invoice Factoring? > Invoice factoring is a way for a business to raise cash by selling its unpaid customer invoices, its accounts receivable, to a third party called a factor. The factor advances part of the invoice value, collects payment from the customer, and pays the rest to the seller minus a fee. It is also called accounts receivable factoring. **Invoice factoring**: Invoice factoring is a way for a business to raise cash by selling its unpaid customer invoices, its accounts receivable, to a third party called a factor. The factor advances part of the invoice value, collects payment from the customer, and pays the rest to the seller minus a fee. It is also called accounts receivable factoring. ## How it works Invoice factoring is the sale of unpaid invoices to a factor, a company that buys receivables and collects them. Washington State's Office of Minority and Women's Business Enterprises describes it this way: companies facing cash-flow problems and slow-paying customers may sell their invoices or accounts receivable to factors, which advance most of the invoice amount after checking the creditworthiness of the billed customer. As of October 28, 2026, that page puts the advance at 70 to 90 percent of the invoice amount. When the invoices are paid, the factor remits the balance, minus a transaction or factoring fee. Infor's documentation for its Infor LN ERP describes the factor as a business partner who buys your receivables, pays for them, and collects the amount from your customers. **How a factored invoice moves** ### 1. Invoice, Assign a factor The seller invoices its customer and assigns a factor to the invoice. ### 2. Advance, Factor pays an advance The seller usually receives the factor's advance against the receivables factored with it. ### 3. Notice, Customer pays the factor The customer is notified to pay the factor, for example by the factor's address printed on the invoice as the pay-to address. ### 4. Settle, Balance remitted When the customer pays, the factored invoice is settled and the factor remits the balance minus its fee. ## Recourse vs. non-recourse factoring Infor's documentation names two forms of factoring: - With recourse: the factor makes a loan against a receivable. Your company continues to assume the credit risk, and you must reimburse the factor if the customer does not pay. - Without recourse: the factor purchases the value of the receivable and takes the risk that the customer will not pay the invoice. To avoid bad debts, the factor usually performs a credit check on the customer before deciding to purchase the receivable. ## Who the customer pays In the US, Article 9 of the Uniform Commercial Code applies to a sale of accounts as well as to transactions that create a security interest in them. Under UCC 9-406(a), subject to the exceptions in that section, the customer who owes the invoice, called the account debtor, may pay the seller until it receives a notification, authenticated by the seller or the factor, that the amount due has been assigned and that payment is to be made to the factor. After that notification, the customer discharges the debt by paying the factor and may not discharge it by paying the seller. This is general information, not legal or financial advice. ## Example A distributor ships $20,000 of product to a contractor on net 30 terms and factors the invoice. The terms below are this example's own settings: - Day 1, advance: the factor advances 80%: $20,000 x 0.80 = $16,000. - Day 30, payment: the contractor pays the full $20,000 to the factor, as the notice on the invoice instructs. - Settlement: the factor keeps a 3% fee: $20,000 x 0.03 = $600. It remits the rest: $20,000 minus the $16,000 advance minus the $600 fee = $3,400. The distributor receives $16,000 + $3,400 = $19,400 in total. ## On Shopify Shopify B2B, on the Basic, Grow, Advanced and Shopify Plus plans, lets you set payment terms for each company location. The available terms are net 7, net 15, net 30, net 45, net 60, and net 90, and all terms start from the day the order is placed. An order on terms stays unpaid until the buyer pays it, which makes it a receivable. During the term, B2B customers can log in to customer accounts, select an order, and pay for it by clicking Pay now. After the terms expire, customers can still make payments but the order displays as Overdue in customer accounts. Who the customer pays on a factored invoice is set by the notice described above, not by the order's payment terms. ## How Uncap helps Uncap's guide to [Shopify net terms](/post/shopify-net-terms) notes that credit checks, credit limits, dunning and AR aging stay a back-office decision, usually run in the ERP and synced to which companies get terms. [Uncap Connect](/products/connect) is a Shopify-to-ERP integration app with native support for B2B companies, locations, catalogs, price lists, and payment terms. ## Related terms - Accounts receivable - Days sales outstanding - Net 30 - Trade credit - Dunning - Letter of credit ## Sources - Infor LN documentation: Factoring of accounts receivables - Uniform Commercial Code 9-406 (Cornell LII) - Washington State OMWBE: Invoice Factoring or Accounts Receivable Factoring ## Frequently asked questions ### How does invoice factoring work? Invoice factoring works like this: the seller assigns unpaid invoices to a factor, the factor advances part of their value, and the factor settles the balance minus its fee once the customer pays. The customer is told to pay the factor, for example through the pay-to address printed on the invoice. ### Is invoice factoring a good idea? It depends on the business and the agreement. Washington State's Office of Minority and Women's Business Enterprises describes invoice factoring as an option for companies facing cash-flow problems and slow-paying customers, and the trade-offs are the factor's fee and, with recourse factoring, keeping the credit risk. This is general information, not financial advice. ### What are the downsides of using invoice factoring? The main downsides of invoice factoring are cost and retained risk. The factor's fee comes off the balance it remits, and under factoring with recourse the seller must reimburse the factor if the customer does not pay. Once notified, the customer also pays the factor instead of the seller.