This page explains how a factory turns an unpaid invoice into cash before the buyer's own payment date, for a merchandiser or finance officer who must pay wages and the next order's deposit while a large invoice sits unpaid. This lesson mainly teaches a money flow: once a factory ships on open account, it holds a receivable, a confirmed but unpaid invoice, and it can either wait the full term for the cash or sell or borrow against that invoice today, at a cost. Mona, the merchandiser at Delta Garments, meets this decision on Order A's T-shirt run sold to Atlas Trading on 90-day open account.
A factory that only ships and waits treats every open account sale the same way, whether or not the wait causes a problem. A factory that never uses receivables finance can find itself unable to start the next order's fabric purchase while a confirmed, good invoice sits unpaid for 90 days. Without a fixed way to compare the cost of turning that invoice into cash early against not having cash at all, a factory either pays for financing it never needed or goes without cash it badly needed.
You need: no previous lesson from this course; a basic sense of an open account sale is useful background.
By the end of this lesson you can:
Not covered here: what a trade credit insurance policy covers if the buyer never pays at all (lesson 5.2); whether the discount fee is worth paying on a given order (lesson 5.3); choosing between receivables finance and credit insurance together on one live order (lesson 5.4).
| Term | Meaning |
|---|---|
| Receivables finance | Turning an unpaid, confirmed invoice into cash before the buyer's own payment date, by selling it or borrowing against it. |
| Factoring | Selling an unpaid invoice to a finance company, called a factor, which pays the factory most of its value now and collects the full amount from the buyer later. |
| Invoice discounting | Borrowing cash against an unpaid invoice while the factory keeps collecting from the buyer itself; the invoice is the loan's own security, not something sold. |
| Discount fee | The charge a factor or bank takes for paying a factory early, usually a percentage of the invoice value tied to how many days early the cash arrives. |
| Open account | A payment method where the buyer pays the factory an agreed number of days after delivery, with no bank guarantee in between. |
| Recourse | A factoring term stating that the factory must repay the factor if the buyer never pays the invoice at all. |
An open account invoice is a real asset the moment goods ship, a confirmed amount a buyer owes on a fixed date, even though no cash has moved yet. A factory does not have to wait for that date. It can sell the invoice to a factor, factoring, or borrow against it while still collecting the payment itself, invoice discounting, and receive most of the invoice's value today instead of on the buyer's own schedule. Both routes charge a discount fee for the early cash, so the decision to use either one always compares that fee against what the factory would otherwise lose by waiting, a missed order, a costly overdraft, or a late supplier payment that damages a relationship worth more than the fee.
| What can differ | The shapes you meet | Why it matters |
|---|---|---|
| Export, Make to Order, open account | Delta Garments ships Order A's T-shirt to Atlas Trading on 90-day open account; the full payment term, plus shipping and customs time already spent, makes the wait for cash longer than a domestic sale of the same goods. | A long export payment term is the shape receivables finance is used for most often, since the wait is longest and the buyer is furthest from the factory to chase. |
| Export, letter of credit | Order A's usual sale to Northline Apparel is paid by letter of credit at shipment, a bank guarantee that already turns the invoice into near-cash once shipping documents are presented, so it rarely needs receivables finance at all. | Not every export sale needs receivables finance; a letter of credit already solves most of the same cash-timing problem another way. |
| Domestic, Make to Stock | Cedar & Co. buys from Delta Garments on 60-day open account for its own domestic shops; the same choice, wait or turn the invoice into cash early, applies at a shorter term and a lower cost, since the buyer is easier to reach and check. | The rule is the same for a shorter domestic term, but the discount fee is usually lower and the need less urgent, since less cash sits waiting for less time. |
| Other product families | A denim order such as Order B's jeans, sold on open account to a buyer needing 2 washes finished before shipment, ties up cash for longer before the invoice even exists, since the invoice is only created once the goods actually ship. | Receivables finance only starts the moment an invoice exists; a longer production and finishing timeline before shipment is a separate cash problem this lesson does not solve. |
Delta Garments ships Order A's T-shirt, 15,000 pieces at FOB USD 3.20, to Atlas Trading on 90-day open account, creating an invoice worth USD 48,000. Mona, the merchandiser, knows the factory needs cash within the week to pay for Order B's denim fabric deposit at Suez Denim. She takes the confirmed invoice to a factor, who advances most of its value 5 days after shipment, charging a discount fee for the 85 days the factor waits instead of Delta Garments waiting. Karim, the production manager, confirms Order B's fabric deposit can now be paid on time because of the cash the invoice released early.
The worked numberThis lesson's worked number uses an illustrative discount fee; always confirm your own factor's or bank's actual rate before using this method on a real order.
A common mistake is treating every open account invoice the same way, always waiting the full term, without checking whether the wait is actually cheaper than paying a discount fee. As the worked number shows, a factor's fee for advancing cash 85 days early can be a small fraction of the invoice's own value, far less than the cost of missing a fabric deposit deadline on another order.
This trap costs real money on every order it touches. If Delta Garments had waited the full 90 days and missed Order B's fabric deposit deadline at Suez Denim as a result, the resulting delay could easily cost more in expedited freight or a renegotiated ship date than the USD 960 discount fee this lesson's worked number shows, money the factory loses by defaulting to waiting instead of checking the actual cost of both choices.
A factory that ships goods on open account is owed money it has not been paid yet. It can wait the agreed number of days for the buyer to pay, or it can turn that unpaid invoice into cash sooner, either by selling it to a finance company or by borrowing against it while still collecting the payment itself. Either way costs a fee, usually a small share of the invoice's own value, for having the cash earlier than the buyer would otherwise send it. Whether that fee is worth paying depends on what the factory needs the cash for and how soon, not on habit. A factory with cash to spare can simply wait; a factory that needs cash now to pay for the next order's materials often finds the fee much smaller than the cost of not having that cash in time.
Mona, the merchandiser at Delta Garments, is deciding how to pay Suez Denim's fabric deposit for Order B, due in 5 days. The facts in front of her:
The document Mona reads, the factor's own written offer:
Should Mona wait the full 90 days for Atlas Trading's payment, or accept the factor's advance to pay Suez Denim's fabric deposit on time? Decide before you open the answer.
She should accept the factor's advance. The USD 960 discount fee is a known, small cost against the invoice's own USD 48,000 value, while missing Suez Denim's fabric deposit would delay Order B's own production start, a cost the decision guide's rule treats as larger and less certain in size.
Two facts, together, decide this. First, Delta Garments' own cash on hand does not cover both payroll and the fabric deposit this week, so without the advance, one of the two payments would be late. Second, the discount fee, USD 960, is far smaller than the likely cost of delaying Order B's own denim fabric purchase, which risks pushing the jeans order's whole 22-week schedule and any resulting late-shipment cost onto its own profit.
Waiting instead of accepting the advance would risk a fabric deposit delay on Order B for the sake of saving a USD 960 fee on an invoice already worth USD 48,000, a poor trade against a production delay whose cost is not yet known but is very unlikely to be smaller.
This lesson's cost is the discount fee set against what not having the cash would cost instead. The discount fee of USD 960 is 2% of the USD 48,000 invoice and about 25% of Order A's own total profit margin of USD 3,900 (15,000 pieces x USD 0.26), a real cost but a known and bounded one. Missing Suez Denim's fabric deposit deadline instead has no fixed number attached to it in advance, since a delayed order start can cascade into a delayed ship date, a possible air freight upgrade, or a renegotiated date with a buyer, any of which can cost far more than USD 960. Comparing a known, bounded fee against an unknown but likely larger cost is the reason receivables finance is worth using here.
Copy this row into the receivables finance and credit insurance decision guide's Decide sheet, using the invoice value and days advanced for the order you are deciding for.
| Check point | Spec says | Found (your entry) | Result |
|---|---|---|---|
| Discount fee and net cash for the invoice, days, and fee rate you enter | Enter the invoice value, days advanced, and discount fee rate into the Decide sheet and record the discount fee and net cash it returns |
Download the full working sheet, with Order A's Atlas Trading advance already filled in, from the link on this course's page.
Download the Receivables finance and credit insurance decision guide (Excel)
1. What is the main difference between factoring and invoice discounting?
2. An invoice worth USD 48,000 is advanced 85 days early at a 2% discount fee. What is the discount fee and the net cash the factory receives?
3. On a different invoice worth USD 30,000, advanced early at a 1.5% discount fee, what is the discount fee and the net cash received?
| EN | AR | FR | TR | Meaning |
|---|---|---|---|---|
| Receivables finance | تمويل الذمم المدينة | Financement des créances | Alacak finansmanı | Turning an unpaid, confirmed invoice into cash before the buyer's own payment date, by selling it or borrowing against it. |
| Factoring | خصم الفواتير (factoring) | Affacturage | Alacak factoringi | Selling an unpaid invoice to a finance company, called a factor, which pays the factory most of its value now and collects the full amount from the buyer later. |
| Invoice discounting | خصم الفواتير | Escompte de factures | Fatura iskontosu | Borrowing cash against an unpaid invoice while the factory keeps collecting from the buyer itself; the invoice is the loan's own security, not something sold. |
| Discount fee | رسم الخصم | Frais d'escompte | İskonto ücreti | The charge a factor or bank takes for paying a factory early, usually a percentage of the invoice value tied to how many days early the cash arrives. |
| Open account | حساب مفتوح | Compte ouvert | Açık hesap | A payment method where the buyer pays the factory an agreed number of days after delivery, with no bank guarantee in between. |
| Recourse | حق الرجوع | Recours | Rücu hakkı | A factoring term stating that the factory must repay the factor if the buyer never pays the invoice at all. |
You now know how to turn an unpaid invoice into cash before its own due date. The next lesson looks at a different risk on the same kind of order, the buyer never paying at all, and what a trade credit insurance policy actually covers when that happens. Back to the course map