Turn Unpaid Invoices Into Immediate Cash

Invoice factoring converts unpaid B2B invoices into cash now. You sell the receivable to a factor at a discount, receive most of the face value within a day or two, and the factor collects from your customer on the original terms. It is not a loan — no debt is created, and approval turns mainly on your customers' credit rather than your own.

That distinction is the whole product. A business with thin credit and $400,000 in receivables from creditworthy commercial customers is often a strong factoring candidate and a weak loan candidate at the same time. This page covers advance rates, real cost, recourse versus non-recourse, which industries fit, and when factoring is the wrong answer.

How factoring works, step by step

1. You deliver the work and invoice the customer on your normal terms — net 30, net 60, net 90.
2. You submit the invoice to the factor, who verifies the work was completed and the customer accepts the invoice.
3. You receive the advance, typically within 24–48 hours of verification. Under standard practice this is generally 70–85% of the invoice's face value for eligible receivables, though strong commercial receivables in some industries advance higher.
4. Your customer pays the factor on the original due date.
5. The factor releases the reserve — the withheld portion — back to you, minus the factoring fee.

The reserve is the part people miss. You do not get 100% up front; you get the advance now and the balance when the customer pays. That structure is what protects the factor against disputes, short-pays, and returns.

What factoring costs

Factoring is priced as a discount fee on the invoice's face value, usually assessed per period the invoice remains outstanding — per 30 days is the common convention. Cost is driven by four things: the creditworthiness of your customers, how long invoices typically take to pay, your monthly volume, and whether the arrangement is recourse or non-recourse.

Because the fee accrues with time, your customers' payment behavior sets your real cost. The same fee schedule produces a very different effective rate on an invoice paid in 25 days than on one paid in 75. Before signing, ask for your own aging report and calculate the average days-to-pay across your top customers — that number, not the headline fee, tells you what factoring will actually cost you.

Dilution: the number underwriters actually watch

Dilution measures the gap between what you invoice and what actually gets collected — credit memos, disputes, short payments, returns, and allowances. It is the single metric that most determines your advance rate. Under standard asset-based lending practice, dilution above roughly 5% draws scrutiny and typically reduces the advance rate, because it signals that a meaningful share of invoiced dollars never converts to cash.

If your dilution is high, the fix is operational rather than financial: tighten your acceptance and delivery documentation so fewer invoices get contested. That work raises your advance rate more reliably than shopping factors does.

Recourse vs non-recourse

This is the most consequential term in the agreement and the most commonly misunderstood.

Recourse factoring

If your customer does not pay, you buy the invoice back or substitute another. You carry the credit risk. In exchange, the fee is lower. Most factoring arrangements are recourse.

Non-recourse factoring

The factor absorbs the loss if your customer fails to pay — but read the definition of failure carefully. Non-recourse almost always covers credit events specifically, meaning the customer's insolvency or bankruptcy. It typically does not cover a customer withholding payment over a dispute, a quality complaint, or a delivery disagreement. Those come back to you regardless of the label on the agreement.

Our page on recourse vs non-recourse factoring compares the two in detail.

What makes an invoice eligible

Not every receivable can be factored. Eligible invoices generally must be:

• Business-to-business or business-to-government. Consumer receivables are not factorable.
• For work already delivered. A signed contract for future work is not a receivable; that is a job for purchase order financing.
• Free of prior liens. An existing UCC filing over your receivables must be released or subordinated first. See funding with a UCC lien.
• Undisputed and current. Invoices already well past due, or in dispute, are typically excluded.
• Owed by creditworthy customers. The factor underwrites your customer, and will usually cap concentration — a customer representing an outsized share of your receivables may be limited.

Which businesses factoring fits

Factoring solves one specific problem exceptionally well: you have done the work, the money is real, and it arrives 30 to 90 days after you need it. Industries where that gap is structural are the natural fit:

• Trucking and freight — the classic use case, where brokers pay on terms and fuel is due now. See trucking funding.
• Staffing agencies — payroll runs weekly while clients pay monthly, a mismatch factoring is built for. See staffing agency funding.
• Construction and subcontractors — long pay cycles and retainage. See working capital for contractors.
• Manufacturing and wholesale distribution — production costs are paid long before the invoice clears.
• Commercial cleaning, security, and business services — labor-heavy work billed monthly in arrears.

Businesses that sell to consumers, take payment at the point of sale, or invoice very small amounts are usually better served by a merchant cash advance or a line of credit.

Invoice factoring for small businesses

Small businesses factor invoices routinely. The product does not screen on your size — it screens on whether your customers are creditworthy businesses or government agencies that pay their bills. A two-person staffing agency billing three corporate clients can be a cleaner factoring file than a larger company billing hundreds of small, slow-paying accounts.

What does change at low volume is structure and price. Factors set monthly minimums, and the cheapest schedules are reserved for whole-ledger arrangements where you commit all receivables from covered customers. Below those minimums you are usually looking at spot factoring — selecting individual invoices, one at a time, at a higher rate per invoice in exchange for no volume commitment. For a business factoring occasionally to cover a payroll gap, that trade is often correct. For one factoring every month, it is expensive, and consolidating onto a whole-ledger schedule is the cheaper path.

The real constraint at small scale is customer concentration. Factors cap how much of your funded ledger a single customer can represent, because one customer paying late stops being a receivable problem and becomes a solvency problem. If one account is 60–70% of your invoicing, expect that account to be limited rather than the application declined — and expect the factor to underwrite that customer closely.

Small firms also reach factoring for a reason worth naming plainly: conventional approval is not a given. In the Federal Reserve Banks’ 2026 Report on Employer Firms, drawn from the 2025 Small Business Credit Survey, 38% of firms applied for a loan, line of credit or cash advance in the prior 12 months, and even at small banks — the lender type most likely to approve — only 57% of applicants were fully approved. Factoring sits outside that math because the credit being assessed is mostly your customer’s, not yours. It is also why a business with a thin file and real commercial receivables gets a different answer here than it does at a bank.

B2B factoring: which customers make the product work

B2B factoring is the only kind there is. Factors buy invoices owed by other businesses or by government agencies, because those obligations are documented, assignable and collectable through commercial channels. Consumer receivables cannot be factored — there is no purchase order, no acceptance record and no commercial credit file behind them.

That makes your customer list the underwriting file. A factor will pull commercial credit on your major accounts, look at their payment history with you, and price the facility on what it finds. Long terms are not a problem: net 60 and net 90 invoices are the core use case, because the whole point is bridging the wait. What does cause problems is anything that makes the obligation ambiguous — progress billing before work is accepted, invoices tied to milestones still in dispute, or contracts containing an anti-assignment clause that bars you from selling the receivable at all. Read your customer contracts for that clause before you shop factors; it is the most common reason a clean-looking ledger turns out to be partly unfactorable.

If your billing is a mix — some commercial, some consumer — only the commercial share is fundable this way. The rest needs a different product, which is where a business line of credit or revenue-based funding covers the gap alongside a factoring facility rather than instead of it.

Factoring vs financing vs an advance

Three products get compared here and they are genuinely different:

• Invoice factoring — you sell the receivable. The factor owns it, collects it, and your customer typically knows. No debt on your balance sheet.
• Invoice financing — you borrow against receivables and keep collecting yourself. Your customer relationship is untouched, and you carry the debt. See invoice financing vs factoring.
• Merchant cash advance — a purchase of future revenue, repaid from daily or weekly sales. No receivables required, faster, and priced accordingly. See MCA vs invoice factoring.

Working with an invoice factoring broker

An invoice factoring broker submits your ledger to multiple factors at once so they compete for it, instead of you accepting the first quote you find. That matters more in factoring than in most products, because advance rates, eligibility rules, concentration caps and industry appetite vary sharply between factors — two can look at the same receivables and price them very differently.

The Broker Shop is a broker, not a factor. We do not buy your invoices; we take one application and put your file in front of the funders in our network of 50+ whose guidelines it actually meets, including factors that specialise by industry. A freight factor and a staffing factor underwrite the same ledger on different assumptions, and knowing which door to knock on is most of the value. It is free to apply, and checking your options won’t affect your credit score.

What to bring: a current accounts-receivable aging report, a customer list with terms, recent invoices with proof of delivery or acceptance, and a UCC search showing whether anything already sits against your receivables. Those four documents let a factor quote accurately rather than provisionally. If you would rather compare providers yourself first, see our rundown of the best invoice factoring companies, and our guide to comparing funding offers for putting two quotes on the same basis.

When factoring is the wrong answer

Factoring will not help if the underlying problem is margin rather than timing. Selling receivables at a discount every month compresses already-thin margins permanently — it fixes cash flow while quietly making profitability worse. If your invoices are collected reasonably promptly and the shortfall is really about pricing or cost structure, address that first; improving your profit margin is the cheaper fix.

It is also the wrong tool if your customers pay quickly, if your receivables are consumer rather than commercial, or if you need capital for something no invoice backs — equipment, a buildout, or an acquisition. In those cases look at equipment financing, a term loan, or an SBA loan.

If you are not sure which fits, compare every funding option or apply once and we will match your file to the funders whose guidelines you meet.