What is accounts receivable factoring and should I use it for my business?
Accounts receivable factoring: what it costs, when it makes sense, and when it doesn't
Short answer
AR factoring means selling your unpaid invoices to a financing company at a discount — typically getting 70–90 cents upfront and the remainder minus fees when the customer pays. It solves a cash flow gap immediately, but it costs 2–8% of invoice face value regardless of how at-risk the invoice actually was. For most service businesses with DSO under 60 days, a first-party follow-up call captures more and gives up less margin. Factoring makes the most sense when payment cycles are structurally long (government contracts, large hospital systems) and when every day of float genuinely costs you more than the factor's fee.
Factoring is not a loan — it is a sale. You transfer the right to collect your invoice to a third-party factor, who advances you 70–90% immediately and sends the remainder (minus their fee) once the customer pays. The fee, called the factoring rate or discount rate, typically runs 1–5% of the invoice face value per 30 days outstanding. On a net-60 invoice, you might pay 2–10% of the total balance just in finance charges.
The two main structures are recourse and non-recourse factoring. With recourse factoring, you have to buy the invoice back if the customer does not pay, so you carry the credit risk. Non-recourse factoring shifts the credit risk to the factor, which is why the rates are higher. Most small business factoring arrangements are recourse, even when the paperwork does not say so clearly.
There is a less-discussed cost beyond the discount rate: the customer relationship. The factor is now the one calling your customer about money. Some factors are professional about this; others are not. If the customer's experience with the factor is bad, that reflects on your business — you sold the invoice, not your reputation. B2B service businesses with long-term clients should weigh this carefully before using factoring on recurring customers.
Factoring makes sense in specific situations: when your payment cycle is structurally long and you cannot change it (government agencies, large health systems, construction retainage), when the cash is needed to fund work-in-progress or payroll today, and when the float cost genuinely exceeds the factor fee. It is less sensible for invoices that just need a phone call — a significant portion of unpaid B2B invoices are late because no one has asked for the money yet, not because the customer cannot pay.
Syntharra approaches the problem differently: a first-party phone call at day 3 past due, made on your behalf, with a 10% success-fee on what is recovered and no monthly cost. The comparison to factoring is directional — you give up nothing if the call fails, and give up 10% only on what is actually collected. A factor charges 2–5% of every invoice you factor, whether it was genuinely at risk or not.