What is Contract Factoring?

Contract factoring, also known as whole ledger factoring or full-service factoring, is a financial arrangement in which a business sells all or a significant portion of its accounts receivable to a factoring company. This type of factoring involves a comprehensive, ongoing relationship between the business and the factor, where the factor provides continuous management of the business’s entire receivables ledger.


Key Aspects of Contract Factoring:

  1. Ongoing Agreement:
    • Unlike spot factoring, contract factoring involves a long-term commitment where the business agrees to factor all or a substantial portion of its invoices over a specified period. This creates a steady relationship between the business and the factoring company.
  2. Continuous Cash Flow:
    • The factoring company provides continuous cash flow to the business by advancing funds on a regular basis for all submitted invoices. This helps the business manage its working capital and maintain liquidity.
  3. Comprehensive Service:
    • The factoring company takes over the management of the entire accounts receivable process, including credit control, collections, and record-keeping. This allows the business to focus on core activities while the factor handles administrative tasks.
  4. Advance Rate and Fees:
    • The factor typically advances a percentage of the invoice value (usually 70-90%) upfront. The remaining balance, minus the factoring fees, is paid once the customer settles the invoice.
    • Factoring fees are usually lower in contract factoring compared to spot factoring due to the ongoing nature of the relationship. Fees are typically a percentage of the invoice value and may also include additional service charges.
  5. Credit Risk Management:
    • Contract factoring can be structured as recourse or non-recourse. In recourse factoring, the business retains the risk of customer non-payment. In non-recourse factoring, the factor assumes the credit risk.
  6. Monitoring and Reporting:
    • The factoring company provides regular reports and updates on the status of the factored invoices, collections, and customer creditworthiness. This helps the business stay informed about its financial position.


Example of Contract Factoring:

A manufacturing company enters into a contract factoring agreement with a factoring company to factor all its invoices over the next 12 months. The agreement includes an advance rate of 85% and a factoring fee of 2%.

  • Total Monthly Invoices: $200,000
  • Advance Rate: 85%
  • Factoring Fee: 2%



Advance Payment: $200,000 × 85% = $170,000

  • Factoring Fee: $200,000 × 2% = $4,000
  • Remaining Balance: $200,000 – $170,000 – $4,000 = $26,000

In this scenario, each month the manufacturing company receives an advance of $170,000. Once the customers pay their invoices, the factoring company deducts the $4,000 fee and remits the remaining $26,000 to the business.


Advantages of Contract Factoring:

  1. Stable Cash Flow: Provides consistent and predictable cash flow, improving the business’s ability to manage expenses and invest in growth.
  2. Administrative Relief: Outsources the management of accounts receivable, reducing administrative burdens and allowing the business to focus on core operations.
  3. Credit Control: The factoring company’s expertise in credit management and collections can improve payment times and reduce bad debts.
  4. Lower Costs: Generally lower fees compared to spot factoring due to the ongoing relationship and volume of invoices factored.


Disadvantages of Contract Factoring:

  1. Long-Term Commitment: Requires a long-term commitment, which may limit flexibility if the business’s needs change.
  2. Cost: While generally lower than spot factoring, the fees can still add up over time and impact profit margins.
  3. Customer Relationship: Customers will interact with the factoring company for payments, which may affect the business’s relationship with its customers.
  4. Creditworthiness Requirement: The factoring company will continuously assess the creditworthiness of the business’s customers, which may limit the invoices that can be factored.



Contract factoring is a comprehensive financial solution that provides businesses with continuous cash flow and administrative support by factoring all or a significant portion of their invoices. By understanding the terms, costs, and benefits, businesses can use contract factoring to manage their finances more effectively and focus on growth and operational efficiency.