Invoice factoring is a financial transaction in which a business sells its accounts receivables (invoices) at a discount to an external financing company, known as a factor or factoring company.
Invoice factoring is also referred to as accounts receivable factoring, or ‘invoice financing.’ However, with some forms of invoice financing, a business owner secures a short-term loan using the unpaid invoices as collateral.
The factoring process first starts with the business owner, who decides which factoring company to work with. After the factor agrees to work with the business owner, the business owner can then start selling their outstanding invoices for working capital. When the factoring company verifies the invoice, the factor pays the business owner 70 to 90 percent of the invoice. Once the business owner’s customer eventually pays the invoice, the factoring company pays the business owner the remainder of the invoice minus a fee.
Recourse Factoring is when your factoring company purchases your receivables but your company must buy back any receivable that the factor cannot collect payment on. Most factoring companies offer invoice factoring with full recourse. This means that your company has to return the advance (and sometimes pay fees) if your customer does not pay their invoice within the specified factoring time frame – usually 90 days. The two most common reasons why factoring companies exercise recourse and return the invoices to a client are customer disputes and credit problems. 
Customer disputes: Invoices that are not paid on time because of a customer dispute represent the vast majority of invoices that are returned to clients. Sometimes these disputes are the result of a small misunderstanding. Other times, there are the result of huge misunderstandings. Regardless, your factoring company is not in a position to be the judge or arbiter in this situation which is why they sell the invoice back to your company. Most invoice disputes can be prevented by good communication and setting proper expectations with your customer.
Credit Problems: Invoices that don’t pay due to client financial problems are also subject to recourse. However, these represent a small portion of the total invoices that are subjected to recourse because factoring companies are good at evaluating credit profiles. The don’t usually purchase invoices from customers with a slow or bad payment record. There is a form of factoring that offers some protection against customer credit defaults – it’s called non-recourse factoring.
When you take advantage of invoice factoring to handle your receivables, you eliminate a lot of the typical headaches that go along with servicing customers. Since the factor does the accounts receivable duties for you, you don’t have to worry about sending out reminders for payment. But what happens if your customer never pays the invoice? The factor company is not going to take the loss without holding someone responsible. If you don’t want to get stuck holding the bag, you may want to consider non-recourse factoring. Basically, non-recourse factoring offers the best of both worlds. You get the convenience of invoice factoring without the responsibility for the debt. 