I am often asked how a factor works to buy/sell invoices, so this is my simple way of explaining it.

Please understand I am writing this only as an information service to readers, I clearly do not condone or condemn the concept that is for each to research to see if it is right or wrong for their business.

Factoring is a way to allow companies that generate invoices to get paid a portion of the invoiced amount; again the key word is a portion as the factor gets a percentage. Typically a vendor or provider of service for hire performs their service, invoices and waits for payment. By factoring it may allow companies to get their owed money faster then they other wise would wait to get paid by the customer.  In factoring you sell your bill to a factoring company. Factoring companies generally work one or two ways, some pay upfront giving the service provider the full amount owed for products or services minus a fee that can range in different percentages, perhaps 5% perhaps more there are a lot of variables.  Other Factor firms may pay a percentage of the outstanding invoice up front to you  â€“ say up to 50 percent and the rest minus a fee once the bill is settled.  Keep in mind more or less factoring firms are bill collectors and are in the business to make money; don’t expect them to carry deadbeats.   You should ask your accountant or your local bank for more information and if it is right for you.

Factoring  is no different to taking a Visa, Mastercard or Amex for payment of services rendered. You get cashflow on the day and give away a fee. Most factors will want to take all your invoices. They do not want you to "cherry pick" the good payers and leave them the "Uglies" They will look at the payment history of each client and work on say 80% on presentation of invoice and pay the balance less their fee once the client pays. They may want to have the payments directed to their "lockbox" rather than trust you to forward on the payment. They will contact your client and "proof" the invoice(s) and of coarse if your client does not pay in an agreed time say 90 days YOU BUY BACK THE INVOICE PLUS A FEE.

You may find construction invoices are not the flavour of the month. Some clients may look upon factoring as a sign that you are in a tight spot. Best tell your clients that you are factoring to improve your cashflow and provide them a better service.