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.
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See My Options →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)
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.
Frequently asked questions
Is factoring expensive?
Compared to a bank line of credit, yes. Compared to an MCA, often cheaper. All-in cost is typically 2–5% per invoice (15–36% APR equivalent). Best for businesses where the alternative is no financing at all.
Do I need good credit to factor invoices?
No. Approval depends on your customers' creditworthiness, not yours. Even 500 FICO owners can factor if they invoice creditworthy B2B clients.
How fast can I get funded?
First funding usually 3–5 business days from application. After the first cycle, future invoices typically fund within 24 hours of submission.
Will my customers know I'm factoring?
With notification factoring, yes — they'll be told to remit payment to the factor. With non-notification, no — payments route to a lockbox you control. Most factoring is notification-based.
Can I factor some invoices but not others?
Yes — "spot factoring" or "selective factoring" lets you choose which invoices to sell. It costs more per invoice than full-volume factoring but offers more flexibility.
What happens if my customer doesn't pay?
With recourse factoring, you buy the invoice back from the factor or replace it. With non-recourse, the factor absorbs the loss — but only for specified reasons (usually customer insolvency, not slow-pay or disputes).
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