Quick Answer: A factoring agreement is a contract where a business sells its unpaid invoices to a third-party financing company (the factor) at a discount in exchange for immediate cash. The factor then collects payment directly from your customers. Agreements come in two forms: recourse (you repurchase unpaid invoices if customers don't pay) and non-recourse (the factor absorbs the default risk). Traditional advance rates run 70% to 90% of invoice value; modern non-recourse platforms like Resolve advance up to 100%.
Key Takeaways:
A factoring agreement is a financial contract between a business and a third-party financing company where the financing company buys the business's accounts receivable at a discounted price. The three parties involved are the seller (your business), the factor (the financing company), and the account debtor (your customer who owes the invoice). The factor pays you an upfront advance, holds a reserve, then collects from your customer directly. When the customer pays, the factor releases the reserve minus its fee.
Read on: All You Need to Know About Accounts Receivable Factoring Companies
When entering into a factoring agreement, you need to understand the specific terms that determine your actual cost and risk exposure. Factoring involves selling invoices to a factor at a discount for immediate cash. The advance rate is the percentage of invoice value paid upfront. The reserve account holds the remainder until your customer pays. Fees, recourse provisions, and termination clauses determine whether the arrangement works in your favor.
When small and mid-sized businesses evaluating factoring enter into a factoring agreement, they receive immediate cash by selling their accounts receivable to a factor at a discount. Traditional advance rates range from 70% to 90% of the total invoice value. The factor holds the remainder in a reserve account until your customer pays.
Example: You submit a $50,000 invoice. At a 90% advance rate, the factor pays you $45,000 immediately. The remaining $5,000 sits in a reserve. When your customer pays the full $50,000, the factor releases the reserve minus its factoring fee (typically 1.5% to 3% of invoice value, so $750 to $1,500 in this example).
Before selecting a factoring company, analyze the buyer's creditworthiness and payment history. Higher advance rates often come with higher fees. Resolve's AI-powered credit check evaluates buyers in real time and can advance up to 100% on approved invoices.
Factoring fees (also called discount rates) vary based on invoice amount, debtor creditworthiness, and payment terms. Fees typically range from 0.5% to 5% per month on the outstanding invoice balance. Read every line of the contract before signing. Additional charges like wire fees, origination fees, and credit check fees can add meaningful cost on top of the headline rate.
The reserve is the percentage of invoice value the factor withholds until your customer pays. If your advance rate is 85%, the factor holds a 15% reserve. Once the customer pays in full, the factor releases the reserve minus its fee. Reserve requirements vary by factor and by buyer risk profile.
Invoice financing and factoring are related but distinct. In factoring, the factor buys your invoices outright and takes over collections. In invoice financing, you borrow against your invoices but retain ownership and remain responsible for collecting payment. Factoring typically moves cash faster; invoice financing keeps collections in your hands.
Read: The Definitive Guide to Accounts Receivable Financing
The recourse provision is the single most important clause in any factoring agreement. It determines who absorbs the loss if your customer doesn't pay.
Recourse factoring: If your customer doesn't pay, you must repurchase the invoice from the factor at full face value. The credit risk stays with your business. Recourse agreements typically carry lower fees because the factor's risk is limited.
Non-recourse factoring: If your customer defaults on an invoice the factor approved, you keep the advance. The factor absorbs the loss. Non-recourse agreements carry higher fees to compensate the factor for taking on credit risk.
Resolve operates as non-recourse financing. If a buyer defaults on an invoice Resolve approved, you keep the advance and Resolve assumes the risk, not your business.
Learn more: recourse and non-recourse factoring and Is Recourse Factoring the Right Cash Flow Solution for Your Business?
Notification factoring (also called open factoring) requires the factor to send a Notice of Assignment (NOA) to your customers, informing them that their invoice has been sold and that payment must go directly to the factor. Your customers learn you're using a factoring company.
Non-notification factoring keeps the arrangement private. Your customers pay as normal, without knowing a third party is involved.
Most traditional factoring agreements require notification. This matters for merchant relationships: customers who receive an NOA from a factor they don't recognize may question your financial stability. Resolve operates under your brand, so your customers never see a third-party name.
Spot factoring lets you choose which invoices to factor. You submit individual invoices selectively, maintaining flexibility over which receivables you monetize.
Whole-ledger factoring requires you to submit all your invoices to the factor. Most traditional factoring agreements are whole-ledger arrangements, which means the factor holds a lien on your entire accounts receivable portfolio. You lose the ability to manage individual customer relationships differently.
Resolve does not require minimum volumes or whole-ledger commitments. Learn more about hybrid factoring approaches that offer more flexibility.
Review every one of these before signing. Each clause has a direct impact on your cost, flexibility, and risk.
Reserves are the percentage of total receivables held back by the factor as security against non-payment. The reserve amount, combined with the advance rate and factoring fee, determines the net cash you receive on each invoice. Reserve requirements vary based on customer creditworthiness and industry risk. Confirm the reserve release timeline in your contract, some factors hold reserves for 30 to 90 days after customer payment.
Renewal and termination clauses define how the agreement extends or ends. Some contracts auto-renew unless you provide written notice 60 to 90 days before the end date. Missing that window can lock you into another full term. Negotiate these clauses based on your business cycle before signing, and confirm the early termination fee structure.
Assignment schedules list the specific accounts receivable sold to the factor, including customer identity, invoice amounts, and payment terms. These schedules are updated each time you submit new invoices. Keep them accurate. Discrepancies between your accounting records and the assignment schedule can trigger disputes or funding delays.
Most traditional factoring agreements include a personal guarantee requiring the business owner to backstop the contract. Under a recourse arrangement, if your business cannot repurchase unpaid invoices, the factor can pursue the owner's personal assets. Understand the full scope of the guarantee, including whether it covers the entire credit line or only specific invoices, before signing.
Traditional factoring and net terms financing solve the same cash flow problem through very different structures. Here is how they compare:
| Traditional Factoring | Net Terms Financing (Resolve) | |
|---|---|---|
| Advance rate | 70% to 90% of invoice value | Up to 100% |
| Credit risk | Recourse (you) or non-recourse (factor) | Non-recourse; Resolve assumes the risk |
| Customer notification | Required (NOA sent to your customers) | White-label; customers see your brand |
| Minimum volume | Often required | Not required |
| Collections | Factor contacts your customers directly | Accounts receivable automation under your brand |
| Fees | 0.5% to 5% monthly | Comparable to card processing (2.9% to 3.5% per transaction) |
| Contract lock-in | Often 12-month terms | No exclusivity requirements |
Unlike factoring, Resolve is a non-recourse alternative to traditional factoring and is not a loan. If a buyer defaults on an invoice Resolve approved, you keep the advance. Resolve absorbs the loss.
Read next: ResolvePay vs Capchase vs Behalf: 2026 Comparison
Selecting the right factoring arrangement requires evaluating five factors:
Non-recourse factoring shifts payment responsibility to the factor. If your customer defaults on an approved invoice, you keep the advance and the factor absorbs the loss. This costs more than recourse factoring, but it eliminates the risk of having to repurchase bad invoices.
Before choosing, confirm the exact scope of non-recourse protection. Some agreements are non-recourse only for credit-related defaults (customer insolvency) but revert to recourse for disputed invoices. Read the definition of "default" carefully.
Explore Resolve, a non-recourse alternative to traditional factoring.
Upfront fees (origination fees, setup fees, wire fees) are standard in factoring agreements and vary by provider. Weigh the total cost of the arrangement against the value of improved cash flow and reduced credit risk. A factoring arrangement that costs 3% per transaction but eliminates bad debt risk and collections overhead may cost less than managing net terms in-house.
Concentration limits and customer credit limits directly affect how much of your receivables you can actually factor. Evaluate your customers' payment history, order frequency, and creditworthiness before assuming you can factor their invoices. If your top three customers represent 60% of your revenue but the factor caps concentration at 25% per customer, a significant portion of your AR is ineligible. Confirm customer-level limits before signing.
Factoring makes sense when:
Factoring doesn't make sense when:
Factoring agreements give businesses a way to convert accounts receivable into cash, but the clauses determine whether the arrangement works in your favor or against it. Understand the advance rate, recourse provision, NOA requirement, minimum volume commitment, and termination terms before signing anything.
For many B2B sellers, there are better alternatives. Resolve advances up to 100% on approved invoices, assumes the credit risk, operates under your brand, and requires no minimum volume or exclusivity. Most teams launch in under a week.
To learn more, talk to one of our product specialists today.
A factoring agreement is a contract where a business sells its unpaid invoices to a third-party financing company (the factor) at a discount in exchange for immediate cash. The factor collects payment directly from your customers. Agreements are either recourse (you repurchase unpaid invoices) or non-recourse (the factor absorbs the default risk).
In recourse factoring, you are responsible for buying back unpaid invoices if your customer doesn't pay. The credit risk stays with your business. In non-recourse factoring, the factor assumes the risk of non-payment on invoices it approved. Non-recourse costs more but eliminates the liability of bad debt from your balance sheet.
Advance rates typically range from 70% to 90% of the invoice value, with the remainder held in a reserve until customer payment is received. Resolve advances up to 100% on approved invoices. The advance rate, combined with the factoring fee, determines your net cash received per invoice.
Yes. Factoring agreements can include origination fees, wire fees, credit check fees, and monthly minimum fees on top of the headline factoring rate. Review every line of the contract. The effective cost of factoring is often higher than the advertised discount rate once all fees are included.
A Notice of Assignment is a formal notification sent to your customers informing them that their invoice has been sold to the factor and that payment must be made directly to the factor, not to you. Most traditional factoring agreements require NOA, which means your customers learn you are using a factoring company. Non-recourse platforms like Resolve operate under your brand, so customers never see a third-party name.
A minimum volume commitment requires you to factor a set dollar amount of invoices per month. If you fall short, you typically owe a supplemental fee. This clause is common in traditional factoring contracts and can be costly for businesses with seasonal or variable revenue. Confirm the minimum volume requirement and the penalty for missing it before signing.
Spot factoring lets you choose which invoices to factor. Whole-ledger factoring requires you to submit all your invoices to the factor. Most traditional factoring agreements require whole-ledger arrangements, which reduces your flexibility and gives the factor a lien on your entire accounts receivable portfolio. Resolve does not require whole-ledger commitments or minimum volumes.
Evaluate customer creditworthiness, advance rates, total fees (not just the headline rate), recourse vs. non-recourse protection, and minimum volume requirements. Confirm whether the agreement requires notification factoring and whether a personal guarantee is included. If you want to protect customer relationships and retain flexibility, consider whether factoring is the right structure at all, or whether a net terms financing platform like Resolve better fits your needs. For further reading on how factoring agreements work in practice, see how to choose the right factoring agreement (bankersfactoring.com).
Further reading: For a neutral overview of whether factoring is the right choice for your business, see the U.S. Chamber of Commerce guide at uschamber.com/co/run/finance/understanding-factoring-receivables.
