What is Factoring?
Factoring is a financing arrangement in which a business sells its accounts receivable (invoices) to a third party (the factor) at a discount in exchange for immediate cash. The factor then collects the full amount from the customers. Factoring can be recourse (the seller bears the credit risk) or non-recourse (the factor bears it).
How It Works
- Business sells goods or services and generates invoices.
- Business assigns the invoices to a factor at an agreed discount (typically 1-5%).
- Factor advances 70-90% of invoice value immediately.
- Factor collects the invoice from the customer at maturity.
- Factor remits the balance to the business after deducting fees.
Saudi Context
SAMA-regulated factoring providers and Saudi banks (Al Rajhi, SNB, Riyad, ANB) offer factoring and invoice financing to Saudi SMEs and mid-corporates, particularly in trading, contracting, and manufacturing where customer payment cycles can exceed 90 days. Kafalah’s invoice financing program guarantees a portion of factoring lines for qualifying SMEs. ZATCA’s e-invoicing creates structured invoice data that streamlines factor onboarding.
Example
A contractor has SAR 10 million in invoices receivable from a government customer, payable in 90 days. A factor advances 85% (SAR 8.5 million) immediately at a 3% discount and SAR 50,000 service fee. After 90 days the factor collects SAR 10 million and remits SAR 1.15 million to the contractor (10m – 8.5m advanced – 0.3m discount – 0.05m fee).