If your business sends invoices and waits 30, 60, or 90 days to get paid, invoice factoring lets you turn those unpaid invoices into cash today. It's not a loan — it's selling money you've already earned, early. Approval is based on your customers' credit, not yours.
How invoice factoring works (step by step)
Invoice factoring is a four-step transaction:
- You deliver goods or services to a B2B customer and issue an invoice (Net 30, Net 60, Net 90).
- You sell that invoice to a factoring company at a small discount.
- The factor advances 80–95% of the invoice to your account within 24–48 hours (the "advance rate").
- When your customer pays the invoice in full, the factor releases the remaining 5–20% minus their fee.
Concrete example: You invoice a customer $50,000 on Net 60 terms. You sell the invoice to a factor with an 85% advance rate and a 2% monthly fee.
- Day 1: Factor wires you $42,500 (85% of $50,000)
- Day 60: Your customer pays the factor $50,000 directly
- Factor's fee: ~$2,000 (2% × 2 months × invoice value)
- Reserve released to you: $5,500 ($7,500 reserve − $2,000 fee)
- Total received: $48,000 on a $50,000 invoice — an effective 4% cost for 60 days of accelerated cash flow
How factoring differs from a loan
This distinction matters because it changes how you qualify and how it shows on your books:
- It's a sale, not a loan. You're selling an asset (the invoice) — not borrowing against it.
- No debt on your balance sheet. Factoring doesn't show as a liability the way a loan does.
- Your credit doesn't drive approval. Your customer's creditworthiness does.
- No fixed monthly payments. Each invoice settles independently when paid.
- No collateral other than the invoice itself. You're not pledging equipment, real estate, or personal assets.
How much invoice factoring costs
Factoring is priced as a fee on the invoice value, charged per period the invoice stays outstanding. Typical structures:
- Flat-fee: 1.5–5% of invoice value, regardless of how long it takes to collect
- Tiered/incremental: 1% for the first 30 days, +0.5% every 15 days after
- Daily: ~0.05–0.1% per day from advance to collection
What drives your rate:
- Volume: Higher monthly factoring volume = lower rate. $500K/mo invoices get rates that $20K/mo can't touch.
- Customer credit quality: Fortune 500 customers cost less to factor than mom-and-pop ones.
- Average days-to-pay: Predictable, fast-paying customers earn lower rates.
- Industry: Construction and trucking factor higher; staffing and government contracts factor lower.
- Recourse vs non-recourse: Non-recourse (factor eats the loss if customer doesn't pay) costs ~50–100 bps more.
Realistic all-in cost for most B2B businesses: 2–5% of the invoice, which converts to roughly 15–36% APR when annualized — cheaper than most MCAs, more expensive than bank lines of credit.
See what your invoices are worth today
One 2-minute application reaches the right funders — including specialty factors. Checking your options won't affect your credit score.
Apply Now →Recourse vs non-recourse factoring
Recourse factoring (90% of deals)
If your customer doesn't pay the invoice, you have to buy it back from the factor (or replace it with another invoice). Cheaper, but you carry the credit risk.
Non-recourse factoring
The factor eats the loss if your customer doesn't pay due to insolvency. Costs more (typically 0.5–1% higher), but transfers credit risk off your books. Be careful: "non-recourse" usually only covers customer bankruptcy — not slow-pay, dispute, or service-quality issues.
When invoice factoring beats other financing options
Factoring shines in five situations:
1. Long B2B payment terms
If your customers pay Net 60 or 90 (standard in trucking, manufacturing, staffing), factoring smooths the cash flow gap without requiring you to borrow.
2. Fast growth strapping your cash
Doubling revenue means doubling invoiced AR. Without factoring, you fund the growth out of operating cash — until you can't.
3. Young business with strong customers
If you have great clients (Fortune 500, government, hospital systems) but only 6 months of operating history, factoring approval is based on their credit, so you qualify even without a long credit history.
4. Bad credit, good customers
Your FICO is 540 but your customers are AAA-rated. Banks won't lend to you. Factors will buy your invoices all day.
5. You don't want debt on your balance sheet
For businesses preparing for an acquisition or seeking equity investment, factoring keeps debt off the books.
Industries where factoring is most common
- Trucking and freight (especially owner-operators)
- Staffing agencies
- Manufacturers
- Government contractors
- Construction subcontractors
- Wholesale distributors
- Medical practices billing insurance (medical factoring is a specialty niche)
What to watch for before signing
Notification vs non-notification
Notification factoring means the factor contacts your customer directly for payment. Non-notification means you continue billing the customer normally, but funds get routed to the factor. Most factoring is notification-based. If hidden factoring is important to you, ask upfront — non-notification costs more.
Contract length and minimums
Many factors require a 12–24 month commitment with monthly minimum volume requirements. Falling below the minimum triggers fees. Negotiate flexible terms upfront, especially in your first contract.
Lockbox setup
Most factors require customer payments to go to a dedicated lockbox (controlled by the factor). This is normal but it means your customer's check is no longer mailed to your office.
Early termination fees
Exiting a factoring contract early often triggers fees of 2–5% of remaining contract volume. Read the exit clause before signing.
Concentration limits
Most factors cap how much of your total factored volume can come from any single customer (often 25–30%). If 70% of your invoices come from one customer, factoring becomes hard.
How to choose the right factoring company
Compare on five dimensions:
- All-in cost (including hidden fees: lockbox, ACH, wire, termination)
- Advance rate (higher = better cash on day 1)
- Speed to first funding (good factors fund in 1–3 business days)
- Customer-service style (especially for notification factors — how will they treat your customers?)
- Contract flexibility (minimums, term length, exit fees)
What is an advance rate?
An advance rate is the percentage of an invoice's face value a funder pays you up front. On a $50,000 invoice at an 85% advance rate you receive $42,500 within a day or two; the remaining $7,500 is held back as a reserve and released to you, minus the fee, once your customer pays. The advance rate sets how much cash you get now. It is not what the money costs.
Those two numbers get confused constantly, and the confusion is expensive. The advance rate is a timing measure; the discount fee is the price. A factor offering a 95% advance at 3.5% per 30 days is more expensive than one offering 85% at 2%, even though the first headline number looks more generous. You will eventually receive the reserve on both deals — the difference is what the factor keeps permanently.
The same mechanic runs underneath bank asset-based lending, where the advance rate is applied to a pool of collateral rather than a single invoice. The OCC's supervisory handbook records that common advance rates there range from 70% to 85% of eligible accounts receivable, with some banks going to 90% on eligible business-to-business receivables. Factoring companies commonly advance more than a bank revolver would, because they are buying the invoice outright rather than lending against a revolving pool.
What advance rate should you expect on your invoices?
For most B2B factoring, expect 80% to 90%, with freight and staffing at the top of that band and construction and medical billing at the bottom. The rate is set by how confident the factor is of being paid in full and on time, so it moves with your customers' credit, your industry's dispute rate, and how concentrated your ledger is — not with your own credit score.
The single most underrated input is dilution: the share of invoiced value that never converts to cash because of returns, allowances, disputes, short-pays and credit memos. The OCC notes that dilution varies by industry but is usually expected to be 5% or less of receivables, and that a rising dilution rate can signal a decline in product or service quality. A factor that measures 12% dilution in your ledger will price for it, and the easiest lever it has is your advance rate. Cleaning up disputes and credit memos before you apply is one of the few things that moves the number in your favour.
Concentration works the same way. If one customer is 70% of your invoiced volume, the factor is effectively underwriting that single company, and most will either cap how much of that customer's paper counts or reduce the advance across the board. Industry matters for the same reason — see how this plays out in practice in our guide to comparing invoice factoring companies.
Why your advance rate applies only to "eligible" invoices
Funders apply the advance rate to eligible receivables, not to your whole ledger. Invoices past a set age, owed by an affiliate, owed by a customer above the concentration cap, unbilled, or subject to a contra-account are commonly excluded — so a 90% advance on a ledger that is half ineligible releases less cash than 80% on a clean one.
The OCC's handbook lists the categories bank lenders commonly designate ineligible, and factoring companies use substantially the same list: receivables delinquent long enough to call collectability into question, receivables that exceed concentration limits, affiliate receivables, re-aged receivables, government receivables subject to the Assignment of Claims Act, foreign receivables carrying legal and country risk, contra-accounts where the customer both buys from and sells to you and can set the debts off against each other, receivables owed by an insolvent customer, and unbilled accounts. Many agreements also apply cross-aging, under which all of a customer's invoices become ineligible once some percentage of that customer's balance goes bad.
So the number to compare between offers is not the headline advance rate but the effective one: eligible invoice value multiplied by the advance rate, less any reserves the agreement lets the funder hold. Ask each funder for its eligibility schedule and its concentration cap in writing, run your own last-90-days ledger through both, and compare the cash that actually lands. That is the comparison a broker should be doing for you across competing funders before you sign anything.
The bottom line: Invoice factoring turns unpaid B2B invoices into cash now by selling them at a small discount. It's ideal for slow-paying creditworthy customers — especially in trucking, staffing, manufacturing, and government contracting. Compare it against a line of credit before committing.
Related: Invoice Factoring Service Details · Business Line of Credit · Loan Alternatives · How Brokers Work
Source: Office of the Comptroller of the Currency — Comptroller's Handbook: Asset-Based Lending (advance rates, dilution and receivable eligibility)