The seller issues an invoice to its customer and assigns it to the factor. The factor pays an advance, typically a large share of the invoice value, and holds the rest as a reserve. When the customer pays the factor in full, the factor releases the reserve minus its fees. Fees usually combine a discount charge, calculated like interest on the advanced amount for the time it is outstanding, and a service fee for managing the sales ledger and collections.

An illustrative example: a manufacturer sells £100,000 of goods on 60-day terms. The factor advances 85%, or £85,000, the next day. The customer pays on day 60. The factor deducts a 1.5% service fee (£1,500) and a discount charge of 1% per month on the advance (£1,700), then releases £11,800. The manufacturer receives £96,800 in total, an effective cost of 3.2% for two months of financing.

In recourse factoring, the seller must buy back an invoice the customer does not pay, so the seller keeps the credit risk and pays lower fees. In non-recourse factoring, the factor absorbs the loss if the customer becomes insolvent, and prices that risk into the fee, often with credit limits per customer. Non-recourse usually covers insolvency only, not disputes over the goods.

In factoring, the customer is told to pay the factor and the factor runs collections. In confidential invoice discounting, a form of invoice financing, the seller keeps collecting and customers are not told. Reverse factoring, or supply chain finance, is started by a large buyer that arranges for its suppliers to be paid early by a bank based on the buyer's own credit rating.

The EU Late Payment Directive 2011/7/EU caps business-to-business payment periods at 60 calendar days unless expressly agreed and not grossly unfair, and 30 days for public authorities, with statutory interest of at least eight percentage points above the reference rate and a minimum of €40 for recovery costs. In the UK, the Business Contract Terms (Assignment of Receivables) Regulations 2018 make contract terms that ban or restrict assigning a receivable ineffective, subject to exceptions, which removes a common barrier to selling invoices.

National law decides whether a non-bank factor needs a licence, and the answer differs between EU states. A buyer of a factoring or revenue-based financing platform reviews dilution (credit notes and disputes that reduce collectable value), concentration in a few debtors, funding lines and their change-of-control clauses, and whether the target's licence covers each country where it buys receivables.