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
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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) — see how factoring fits with the rest of trucking company funding
- 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)
Comparing five dimensions across several factors is slow to do alone, and factors rarely publish their eligibility rules. An invoice factoring broker sends one application to factors that specialise in your industry and lines up their offers on the same terms, so you can see cost, advance rate and concentration caps side by side before you sign.
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.
Flat-fee vs. tiered factoring fees: how the pricing structure works
A flat-fee factoring agreement charges one fixed percentage of the invoice no matter when your customer pays, usually up to a stated cut-off day. A tiered agreement charges a smaller first-period fee and adds another increment for each extra period the invoice stays open. Which one costs less depends almost entirely on how fast your customers actually pay.
Think of the two schedules as lines on a chart. The flat fee is a horizontal line; the tiered fee is a staircase that starts lower and climbs every 10, 15 or 30 days. There is a crossover day where the staircase reaches the flat line. Every invoice your customer pays before that day is cheaper on the tiered schedule, and every invoice paid after it is cheaper on the flat one. So a business whose customers reliably pay in 25 days and a business whose customers drift to 70 days can be quoted identical schedules and get opposite answers.
Two details decide the real comparison. First, read what happens after the flat period ends: most flat-fee agreements cover a set window (often the first 30, 60 or 90 days) and then switch to additional charges, so "flat" is rarely unlimited. Second, check what the fee is calculated on — the full face value of the invoice or only the amount advanced — because the same percentage costs noticeably more on face value. The practical test is to run your last 90 days of paid invoices through both schedules, using the actual days each one took to pay, and compare the total dollars each funder would have kept.
What is a concentration limit in factoring?
A concentration limit is the maximum share of your factored receivables that a funder will accept from any single customer. Invoices from that customer above the cap are treated as ineligible, so they earn no advance even though they are perfectly good invoices. Funders use the cap to avoid one customer's slow payment or failure sinking the whole account.
A worked example makes the effect clear. Say your open invoices total $200,000, and one customer owes $120,000 of it — 60% of the ledger. If the funder caps any one customer at 25%, it will count at most $50,000 of that customer's paper. The other $70,000 becomes ineligible, leaving an eligible pool of $130,000 instead of $200,000. At the 85% advance rate used earlier on this page, that is $110,500 of cash up front rather than $170,000 — a $59,500 difference caused entirely by who owes you the money, not by your credit or your invoices' quality.
Concentration caps are negotiable more often than owners assume. A funder will sometimes raise the cap for a customer with strong, verifiable credit (a large public company or a government agency, for example), or accept credit insurance on that customer's invoices. Over the longer run, the only permanent fix is a broader customer base. If one customer dominates your ledger, ask each funder for its concentration cap in writing before you compare advance rates, because the cap can matter more than the rate.
Factoring for construction: retainage, progress billing and lien waivers
Construction invoices are harder to factor than most B2B receivables because payment is conditional. Part of each progress billing is often held back as retainage until the job is finished, pay-when-paid clauses tie your payment to the owner paying the general contractor, and billings can be disputed or offset. Factors work with construction, but they advance on less of the ledger.
Retainage is the biggest single drag. On federal construction contracts, the Federal Acquisition Regulation says retainage is decided case by case, shall not exceed 10 percent of the approved estimated amount, and must be paid promptly once all contract requirements are complete. Private contracts set their own percentage. Either way, most factors treat retained amounts as ineligible until they are actually released, so a subcontractor billing $100,000 with 10% retained can usually only factor the $90,000 that is currently due — and only once that billing has been approved.
What makes a construction file factorable is paperwork that proves the money is owed and unencumbered: approved pay applications rather than invoices the general contractor has not signed off, executed change orders for any extra work, and lien waivers or joint-check arrangements so the factor knows suppliers will not claim the same funds. Factors that specialise in construction know how to read these documents; a general factor may simply decline. For broader options that do not depend on invoice approval, see our guide to working capital for contractors.
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
Sources: Office of the Comptroller of the Currency — Comptroller's Handbook: Asset-Based Lending (advance rates, dilution and receivable eligibility); Federal Acquisition Regulation 32.103 — Progress payments under construction contracts (retainage not to exceed 10 percent of the approved estimated amount)