Factoring
Selling a future receivable or payment stream for immediate cash at a discount — the same principle that underlies buying a mortgage note.
Factoring is the practice of selling a future receivable or payment stream for immediate cash at a discount. Classically, factoring refers to a business selling its accounts receivable (unpaid customer invoices) to a third party — a "factor" — for cash now, rather than waiting 30, 60, or 90 days to collect. The term has broadened to cover the purchase of many kinds of future payments, and it is conceptually identical to what a note buyer does: convert tomorrow's payments into today's lump sum, minus a discount for time and risk.
The core idea
Whoever is owed future money may prefer cash today. A factor buys that right to be paid:
- A business sells its invoices to fund payroll or growth instead of waiting on customers.
- A note holder sells a mortgage note's payments to a note buyer for a lump sum.
- A structured-settlement recipient sells future payments to a factoring company.
In each case, the price is the present value of the future cash at the factor's required discount rate — less than the face amount, because money now beats money later and the factor takes on collection and timing risk.
Factoring vocabulary you may hear
- Advance rate: the percentage of the receivable's face value paid up front.
- Discount / factor fee: the factor's compensation — analogous to the discount on a note.
- Recourse vs. non-recourse factoring: whether the seller must buy back receivables that go unpaid (similar to recourse in a note sale).
How factoring relates to note buying
The note-buying industry grew up alongside the broader cash flow industry, and the skills transfer directly. A company that buys owner-financed mortgage notes is, in essence, factoring a real-estate-secured payment stream. The same present-value math, the same discount logic, and the same emphasis on the quality of the payor and the security behind the payments apply. The big difference is the collateral: a mortgage note is backed by real estate (a deed of trust or mortgage), which makes it more secure than an unsecured invoice and supports better pricing.
Why the distinction matters
Understanding factoring helps a note seller see the logic of their offer: you are factoring your note's future payments. The discount is not arbitrary — it reflects the time value of money and the buyer's risk. Anything that reduces that risk (strong payment history, a solid borrower, low LTV, first-lien security) lowers the discount and raises your lump sum, exactly as a low-risk receivable factors at a better advance rate.
What it means if you hold a payment stream
Mortgage Note Capital focuses on real estate notes, which are factored (purchased) based on the payment stream and the property securing it. If you hold a non-real-estate receivable — business invoices, for example — a general factoring company is the right counterparty. Either way, the principle is the same: a reliable future payment stream can be turned into cash today at a fair, present-value-based discount.