Glossary / Funding and payment
Also known as: Invoice factoring, accounts receivable factoring
Factoring is a financing method in which a business sells its unpaid invoices or receivables to a third party, called a factor, at a discount in exchange for immediate cash. The factor then collects the full amount from the party who owes it.
Wikipedia defines factoring as "a financial transaction and a type of debtor finance in which a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount." Three parties are involved: the seller of the receivable, the factor that buys it, and the debtor who owes the money.
According to the same entry, factors commonly advance part of the invoice value upfront and pay the remainder, less fees, once the invoice is paid in full. Factoring can be "with recourse," where the factor can collect unpaid amounts from the seller, or "without recourse," where the factor bears the loss if the debtor does not pay. It can also be notification factoring, where the debtor is told of the sale, or non-notification, where the seller keeps collecting on the factor's behalf.
Factoring is the general business concept behind many forms of early payment. A Commission advance shares the basic idea: a broker's earned but unpaid commission is a receivable owed by the landlord, and selling it brings the payment date forward in exchange for a discount on the amount.
The same variables that matter in factoring matter for a broker. The discount determines how much less than the full commission you net. The Recourse vs non-recourse terms decide whether you are on the hook if the landlord never pays. Notification decides who must be told: on a commission, the brokerage that receives the landlord's check typically has to know where to send the funder's share, which is why an Assignment of commission or a signed direction to pay is common. Specific terms depend on the contract.
When comparing any early-payment option, ask the three factoring questions: how big is the discount, who bears nonpayment risk, and who gets notified.
