AR Factoring: A Simple Guide for Businesses

AR Factoring is no longer a niche tool used quietly by distressed companies. Over the past few years, it has become a mainstream strategy for modern finance teams trying to navigate an unfamiliar reality: customers are paying slower than ever.

Enterprise clients routinely push payment terms to net 60, 75, or even 90 days. Banks have tightened approval processes. Interest rates have made working capital more expensive. Venture funding is slower. And CFOs are now expected to manage liquidity without taking on unnecessary debt or dilution.

In this environment, Factoring AR offers something rare: liquidity without borrowing, predictability without dilution, and speed without heavy collateral. That combination is why SMBs, SaaS companies, logistics firms, consulting firms, and B2B services have all turned to it.

This guide breaks down AR factoring through a business lens, how it works, what it costs, when it helps, and what finance leaders need to watch for.

What is AR factoring? 

At its core, AR Factoring is the sale of accounts receivable. Instead of waiting for customers to pay their invoices, a business sells those invoices to a factoring company at a discount and receives most of the value upfront.

Traditional factoring was paperwork-heavy, time-consuming, and primarily used by manufacturing or export companies. The factor performed credit checks manually, mailed notices, and relied on slow reconciliation processes.

Today, AR factoring has evolved dramatically:

• Invoices can be verified through APIs.
• Payment history is tracked automatically.
• Dashboards show real-time advance amounts.
• Settlement is tracked in structured, digital workflows.
• Factoring can be done selectively rather than on all invoices.
• Risk scoring models evaluate both invoice reliability and customer credit patterns.

Modern AR platforms allow non-notification factoring (where the customer does not interact with the factor) and seamless reconciliation without manual intervention.

How AR factoring works: A step-by-step walkthrough

1. You issue an invoice

You deliver the service or product and invoice your customer, usually on net 30 to 90 terms.

2. You send the invoice to the factor

The factoring partner verifies it by checking customer creditworthiness and validating that the service was indeed delivered.

3. You receive an advance payment

Factors typically pay 70 to 90% of the invoice amount upfront. Lower-risk industries can get even higher percentages.

4. The customer pays the factor

Based on the due date of the invoice, whether in 30 days or 90 days, the factor receives the payment in full from your customer.

5. You get the remaining balance

After deducting fees, the factoring company sends you the rest.

Example of accounts receivable (AR) factoring calculation

Let’s say you raised an invoice of $100,000 on June 15 to your XYZ Inc., your customer. XYZ Inc. has payment terms of 90 days, which means you will only receive the money on Sept 15. 

However, Factor A offers to pay you 90% today (on June 15) and the remaining upon the clearance of the invoice (on Sept 15) for a fee of 3% of the invoice value.

Therefore, you get $90,000 on June 15 from Factor A.

Factor A gets $100,000 from XYZ Inc. on Sept 15.

Factor A deducts $3,000 (3% of $100,000) as fees and returns $7,000 to you on Sept 15.

But who takes on the risk of non-payment?

There are 2 types of factoring that you can opt for:

1. Recourse factoring: If the customer does not pay, you must repay the factor. In this case, the factor’s fee is lower.
2. Non-recourse factoring: The factor takes on the credit risk. The factor’s fee is higher, but the risk is lower for you.

Most SaaS and B2B companies prefer recourse factoring because their enterprise customers have strong credit profiles, and the savings on fees are significant.

What impacts your AR factoring rate?

1. Customer creditworthiness

The more reliable and creditworthy your customers are, the lower your factoring rate, as the risk of non-payment is reduced.

2. Industry

Certain industries like transportation and construction tend to have higher rates due to variable project cycles and higher payment uncertainty.

3. Invoice volume

A higher number of invoices spreads risk over more transactions, generally resulting in lower rates.

4. Time to payment

The longer the payment terms on invoices, the higher the factoring cost due to extended risk exposure.

5. Recourse vs non-recourse

Non-recourse factoring, where the factor absorbs non-payment risk, usually costs more. With recourse factoring, where you keep some risk, rates tend to be lower.

Impact of AR factoring

Impact on revenue recognition (ASC 606 + IFRS 15)

Factoring does not change when revenue is recognized. Revenue is still recognized when the performance obligation is satisfied, in accordance with ASC 606, not when cash is received.

However, factoring requires:

• Disclosures about risk transfer
• Tracking variable consideration (if applicable)
• Clear documentation on derecognition of receivables

However, once revenue is recognized and AR is recorded, any factoring arrangement is governed not by ASC 606 but by ASC 860, which determines whether the receivable can be derecognized.

ASC 860 and how AR factoring is actually accounted for

Even though factoring deals with invoices, it is not governed by revenue rules. Once revenue is recognized under ASC 606 and the receivable is created, any decision to factor that receivable falls under ASC 860, which governs the transfer and derecognition of financial assets.

In simple terms, ASC 860 decides whether the factored AR receivable should leave your balance sheet or stay on it:

• If you sell the receivable without recourse and no longer control it, the AR is removed from your balance sheet (true sale treatment).
• If you still carry any obligation (recourse factoring), the transfer is treated as secured borrowing, and AR stays on your balance sheet.

ASC 606 governs revenue timing. ASC 860 governs what happens when that AR is transferred.

Impact on financial reporting

Factoring affects more than cash flow:

• The balance sheet shows reduced AR but higher cash
• The income statement reflects factoring fees
• Cash flow statement classification changes based on structure
• Footnotes must disclose arrangements transparently

This is why factoring is most powerful when used deliberately, not reactively.

Typical AR factoring rate components

Why businesses choose AR factoring

1. Liquidity when it matters

Instead of waiting months for payments, companies convert revenue into cash immediately. For B2B or SaaS companies with high CAC or long sales cycles, this supports runway, payroll, marketing ramps, and expansion.

2.Scales with revenue

As your invoicing grows, your access to funds grows with it. Unlike credit lines, factoring does not require hard collateral.

3. Protects equity

Founders can avoid raising equity to solve short-term cash gaps, preserving ownership.

4. Smoother cash flow forecasting

Factoring reduces DSO and stabilises cash flow models.

Why some businesses avoid AR factoring

1. Cost can be significant

Factoring is more expensive than traditional credit. Effective annualised rates can be high if payment terms are long.

2. Customer experience risk

Poorly managed factoring can confuse customers if communication is unclear.

3. Hidden fees

Some older firms still rely on opaque pricing models.

4. Overreliance can be dangerous

If a company uses factoring constantly, it may signal deeper issues with customer vetting or collections.

What businesses get wrong about AR factoring

Many businesses approach factoring reactively, which leads to unnecessary costs or poor outcomes.

1. Not reading the contract carefully: Minimum lock-in periods, usage thresholds, or termination penalties catch many teams off guard.
2. Poor customer vetting: If your customers pay late or dispute invoices often, your cost rises sharply.
3. Treating factoring as permanent capital: Factoring should support temporarily strained cycles, seasonal spikes, or growth as opposed to replacing healthy AR processes.
4. Using factoring for risky invoices: Invoices with poor payment reliability increase fees and introduce disputes.
5. Lack of integration or data readiness: Messy AR records lead to delays, lower advance rates, and audit friction.

Zenskar streamlines AR factoring and receivables management

Zenskar dramatically improves AR operations in ways that are critical for successful AR factoring. Zenskar does so by improving the quality, predictability, and visibility of receivables, which are the three factors that most influence advance rates, underwriting confidence, and overall factoring outcomes. Its AR automation ensures that invoices are accurate, aging is clean, collections are consistent, and reporting is audit-ready.

Automated, accurate invoicing that improves AR quality

Zenskar pulls customer, contract, usage, and tax data directly from source systems and auto-generates invoices based on predefined rules. By removing manual entry and calculation errors, it reduces disputes and creates a more reliable AR pool. This is something that factoring partners value when assessing invoice collectability. Even for complex billing structures like usage-based billing, Zenskar makes it easy with a billing system designed for seamless data integration.

Automated reminders and dunning that tighten aging buckets

Configurable reminder schedules and multi-stage dunning workflows help finance teams collect faster and reduce DSO. Better aging distribution, especially a higher concentration in 0 to 30-day buckets, typically results in stronger advance rates and lower discount fees during factoring.

Risk-based customer segmentation for smarter factoring decisions

Finance teams can segment customers by payment behavior, geography, invoice size, or aging status. This makes it easier to decide which receivables to factor and which to hold, optimizing both cost and risk when engaging with factoring partners.

Integrated payment links that accelerate cash inflows

With embedded payment links and gateway integrations, customers can complete payments directly from their invoices. Streamlined payment flows reduce friction and variability, improving cash predictability, which is a key input for favorable factoring pricing.

Centralized AR dashboard with real-time visibility

Zenskar consolidates invoice status, partial payments, reversals, refunds, and settlement timelines into a single AR workspace. Finance teams get instant visibility into aging, forecasts, and collections performance, making it easier to prepare underwriting-ready AR files and model cash needs before factoring. This is particularly useful for large organizations spread across multiple legal entities where multi-entity billing plays a crucial role.

Automated reconciliation and accounting integration

Payments sync automatically from various integrated gateways and map cleanly to invoices. Zenskar also posts journal entries to integrated systems, eliminating reconciliation errors and creating a transparent audit trail. This is essential when derecognizing factored invoices or reconciling factor payouts.

Zenskar helped Pontera reduce a week-long manual invoicing cycle to billing 500+ customers in two days, shortened their close by five weeks, saved roughly $12,000 per month in manual AR effort, and completed more than $5M in accurate “1-click” collections. These improvements produced cleaner AR data, faster collections, and stronger operational maturity, which are exactly the qualities that factors look for when pricing and approving receivables.

‍Book a demo or watch our product tour to see how Zenskar helps modern finance teams streamline AR, optimize cash flow, and strengthen factoring outcomes.