What is Accounts Receivable Factoring?
Accounts receivable factoring is a financial transaction where a business sells its outstanding invoices to a third-party company, called a factor, at a discount in exchange for immediate cash.
Instead of waiting 30, 60, or 90 days for customers to pay their invoices, businesses can access funds right away. This helps improve cash flow without taking on debt.
The factor assumes the responsibility of collecting payment from the customers. In return, the business receives a percentage of the invoice value upfront, typically between 70% to 90%.
How Accounts Receivable Factoring Works
The process begins when a business completes work or delivers services but hasn’t yet been paid. Rather than waiting for the payment terms to expire, the business sells the invoice to a factoring company.
The factor advances a large portion of the invoice value immediately, usually within 24 to 48 hours. Once the customer pays the invoice in full, the factor releases the remaining balance to the business, minus a factoring fee.
The factoring fee typically ranges from 1% to 5% of the invoice value, depending on factors like invoice size, customer creditworthiness, and payment terms. The factor handles all collection activities directly with the customer.
Accounts Receivable Factoring Formula
The calculation for accounts receivable factoring involves two main components: the advance rate and the factoring fee.
Advance Amount = Invoice Value × Advance Rate
Factoring Fee = Invoice Value × Fee Percentage
Total Received = Advance Amount + (Invoice Value – Advance Amount – Factoring Fee)
For example, if a business factors a $10,000 invoice with an 85% advance rate and a 3% fee, they receive $8,500 upfront. When the customer pays, they receive an additional $1,200 ($10,000 – $8,500 – $300 fee), for a total of $9,700.
Accounts Receivable Factoring in Real Estate
Real estate businesses frequently use accounts receivable factoring to maintain steady cash flow between project milestones. Property management companies, real estate developers, and commercial brokerages often face extended payment cycles.
Construction and development firms may factor invoices from completed project phases while waiting for draw payments or final settlements. This allows them to pay subcontractors, purchase materials, and fund ongoing operations without delays.
Property management companies can factor rent collection invoices or maintenance service fees to cover immediate expenses. Commercial real estate brokers may factor commission invoices from large transactions that have closed but not yet paid out.
Additionally, real estate service providers like appraisers, inspectors, and consultants use factoring to bridge gaps between completing work and receiving payment from institutional clients.
How Real Estate Businesses Use Accounts Receivable Factoring
Real estate developers commonly apply factoring when they’ve completed construction milestones but need immediate funds for the next phase. Rather than pausing work or seeking expensive bridge loans, they convert pending payments into working capital.
Property management firms use factoring to handle seasonal fluctuations or unexpected maintenance costs. When managing multiple properties with varying payment schedules, factoring provides predictable cash flow for payroll and vendor payments.
Commercial brokerages leverage factoring after closing large deals that involve delayed commission payments. This allows agents and firms to reinvest in marketing, hire additional staff, or pursue new opportunities without waiting months for commission checks.
Real estate contractors and service providers factor invoices from institutional clients, REITs, or government entities that have lengthy payment approval processes. This ensures they can maintain operations and take on new projects continuously.
Accounts Receivable Factoring in Other Words
Think of accounts receivable factoring as selling your “right to future payment” for cash today. You’re essentially trading a small discount for immediate liquidity.
It’s different from a loan because you’re not borrowing money or creating debt on your balance sheet. Instead, you’re accelerating payment on money already owed to you.
In simpler terms, accounts receivable factoring is like getting paid now for work you’ve already completed, rather than waiting weeks or months for your customer’s payment to arrive.
