Companies sell their receivables to turn unpaid invoices into cash within a day or two instead of waiting the 60 to 90 days customers now typically take to pay, and, depending on how the deal is written, to push some of the risk of nonpayment and the chore of collections onto the buyer. The practice is commonly called factoring, and the reasons a business chooses it usually come down to three things: speed, risk transfer, and how the numbers land on the financial statements.
Cash In Days Instead of Months
The most direct reason to sell receivables is that the business needs money now. Standard business-to-business terms run from Net 30 to Net 90, and reality is often worse: the average B2B invoice takes roughly 65 days to get paid. Payroll, rent, and suppliers don’t wait that long.
Selling an invoice to a factor compresses that timeline sharply. The seller submits the invoice, the factor verifies it, and cash lands, typically 75% to 95% of the face value, within one to two business days. The remaining balance, minus the factor’s fee, is released once the customer actually pays.
Seasonal and fast-growing companies feel this most. A retailer stocking up before the holidays, a landscaper buying equipment before spring, or a business that just won a large contract all need to spend money months before the corresponding revenue arrives. Selling existing receivables funds that gap without adding new debt.
Qualifying is also easier than a traditional bank loan. Factors underwrite the creditworthiness of the customers who owe the invoices, not the seller’s own financial history. That opens factoring to startups, businesses with thin credit files, and companies climbing out of a rough patch, all of which would struggle to get a bank line.
Handing Off Credit and Collection Risk
Every open invoice carries the risk that the customer won’t pay, and chasing late payments burns staff time. Selling receivables can shift some of that exposure and most of the operational work to the factor. How much actually transfers depends on the contract.
Recourse vs. Non-Recourse
In a recourse arrangement, the seller gets cash upfront, but if the customer doesn’t pay within a set window (typically 60 to 120 days), the seller has to buy the invoice back or replace it with another eligible one. The credit risk stays with the seller. Fees are lower and approval is easier, which is why most factoring deals are structured this way.
Non-recourse factoring sounds like a full transfer of risk, but the protection is narrower than the name suggests. In most non-recourse contracts, the factor absorbs the loss only if the customer becomes legally insolvent, such as filing for bankruptcy during the covered period. Disputes over quality, short payments, late deliveries, documentation problems, and fraud almost always remain the seller’s responsibility. Since disputes are the most common reason invoices go unpaid, non-recourse coverage rarely applies where sellers assume it will. It does provide real protection against the catastrophic scenario of a major customer going bankrupt, which is what makes it worth the higher fees for companies concentrated in a few large accounts.
Collections Off the Seller’s Desk
Regardless of recourse terms, the factor generally takes over the daily work of collecting. Sending reminders, managing late invoices, and escalating delinquent accounts requires people and systems. Handing that to a factor with specialized infrastructure frees internal teams for operations, and factors often collect faster than an in-house team would.
Cleaner Financial Ratios
Selling receivables can also improve how the business looks on paper, though the effect is narrower than the headline suggests.
Days Sales Outstanding, the average number of days between sale and payment, drops when invoices convert to cash immediately. A lower DSO signals efficient collection to lenders and investors and means less capital is trapped in unpaid customer balances.
The balance-sheet effect depends on classification. If the factoring arrangement qualifies as a true sale under accounting standards, the receivables come off the books entirely. Total assets shrink, return on assets rises, and leverage ratios look healthier. If instead the transaction is treated as a secured borrowing, the receivables stay on the balance sheet and a matching liability appears, so the ratios don’t improve.
One common misconception is worth flagging: simply converting receivables into cash does not, by itself, improve the current ratio, because both are current assets. That ratio only shifts if the proceeds are used to pay down current liabilities. What does change is the quality of the current assets, and lenders know that a dollar of cash is more reliable than a dollar of receivables that may never be collected.
What Selling Receivables Costs
Factoring is not cheap money, and the effective cost is the main reason sellers weigh it against other options.
Rates typically run 1% to 5% of the invoice’s face value per 30-day period, with higher-risk industries such as construction sometimes above 5%. The fee is usually tiered by how quickly the customer pays: less for 15 days, more for 60. On top of the headline rate, sellers should look for:
- A reserve holdback of roughly 5% to 25% of each invoice, released after the customer pays in full. The money comes back, but it’s tied up in the meantime.
- Setup and administrative fees, including origination charges or monthly account maintenance costs.
- Chargeback fees in recourse deals, applied when a customer doesn’t pay inside the allowed window. Factors typically attempt collection for 60 to 90 days before charging the amount back, often by deducting it from future advances.
- Minimum monthly volume requirements and contracts that lock the seller in for a year or longer.
Annualized, the cost is almost always higher than a bank loan. A 2% fee on a 30-day invoice works out to roughly 24% a year, which shocks people the first time they run the numbers. The comparison is not entirely fair, since factoring offers speed and flexibility a bank loan doesn’t, and for businesses that can’t qualify for traditional financing it may be the only option keeping operations running. But it does mean the decision to sell receivables should be a deliberate one, not a default.
When Selling Receivables Doesn’t Make Sense
Factoring solves real problems, but it isn’t the right tool for every situation. Costs mount fast with long payment cycles: if customers routinely take 90 days to pay, that’s three months of fees on every invoice, and the annualized cost starts looking like a credit card.
Companies with only a few large customers often struggle to find good terms. Factors prefer diversified receivable pools because risk is spread across many payers. If most of the revenue comes from two accounts, the factor sees concentrated risk and will either price for it or decline.
Factoring also doesn’t fix an underlying business problem. If margins are thin enough that the discount wipes out the profit, the issue is pricing or costs, and faster cash won’t solve it. If customers regularly dispute invoices, factoring surfaces those disputes as chargebacks rather than resolving them.
For companies with strong credit and established banking relationships, a line of credit or an accounts-receivable lending facility, where receivables serve as collateral rather than being sold outright, often provides similar liquidity at lower cost. Selling receivables tends to make the most sense for businesses that need speed, can’t qualify for conventional financing, or operate in industries where long payment terms are unavoidable and the cost of waiting outweighs the discount.
Legal and Relationship Hurdles to Work Through First
A few practical obstacles can slow or block a sale of receivables, and they’re worth checking before signing anything.
Some customer contracts include anti-assignment clauses that appear to prohibit transferring the receivable. In most commercial contexts these have limited bite: under the Uniform Commercial Code, a contract term restricting assignment of an account receivable is generally ineffective, and so is a term that would trigger a default or penalty because of an assignment. The rule exists to keep commercial financing flowing. It isn’t absolute, though; certain categories, including health-care-insurance receivables, are excluded.
Federal government contracts run on different rules. Under the Assignment of Claims Act, receivables from a government contract can be assigned only if total contract payments are at least $1,000, the assignment goes to a bank or other financing institution, and the contract doesn’t expressly forbid it. The assignment must cover all unpaid amounts, go to one party only, and can’t be reassigned. Written notice is required to the contracting officer, the surety on any bond, and the disbursing officer.
Existing liens are where deals most often fall apart. Factors typically file a UCC-1 to establish their interest in the receivables. If the business already has a bank loan with a blanket lien covering all assets, that earlier filing generally has priority. Getting the bank to subordinate its interest or carve out the factored receivables is usually a prerequisite, and skipping the step causes problems later.
Finally, there’s the customer-perception question. In notification factoring, customers receive a formal letter directing payment to the factor. In industries where factoring is standard, such as trucking and staffing, no one blinks. In industries where it isn’t, the notice can prompt questions about whether the seller is in financial trouble. Non-notification arrangements avoid this by keeping the factor invisible to the customer, but they carry higher fees and aren’t offered by every factor. That trade-off, between protecting relationships and minimizing cost, is one of the more consequential choices in structuring the deal.