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A factoring contract is an agreement where a small business sells outstanding invoices to third parties ? known as factors ? in exchange for upfront cash. When these invoices, or accounts receivable, are paid by clients, the money will go to the factor, rather than the small business itself.

Factoring is a type of financing agreement where a creditor buys the rights to or the credit risk of a company's accounts receivable. Instead of getting a loan from a bank, a company may sell their accounts receivable to a creditor for a fee instead to shore up immediate cash or improve their balance sheets.

List of typical factoring requirements: Your company sells to businesses. You have creditworthy customers. Your sales are $5,000 or more per month. You have limited or no access to bank financing. Your company is incorporated in US. You give customers 30 or more days to pay.

Invoice financing is similar to a traditional secured loan in that it has set payment terms and interest charges accumulate on outstanding balances, but it uses one or more invoices as collateral for the loan. In invoice factoring, the cash the business receives isn't in the form of a loan.

If you want to change your existing invoice factoring arrangement, or terminate the facility, review the amendment or termination conditions in your contract. If you are within the notice period for exit, you may be able to exit the agreement without incurring a financial penalty.

Factoring is not considered a loan, as the parties neither issue nor acquire debt as part of the transaction. The funds provided to the company in exchange for the accounts receivable are also not subject to any restrictions regarding use.

What Is a Factoring Agreement? A company and a factor enter into an agreement in which the factor purchases a company's accounts receivable (such purchased accounts are called factored accounts), collects on the factored accounts, then pays the company the purchase price of the accounts.

Bank loans are borrowed money you have to repay, and they are a liability. They also count as debt on your balance sheet. With accounts receivable factoring, you aren't borrowing money; you're simply changing who owns the invoice and who collects payment from your customer.