A factoring company buys your unpaid business-to-business invoices at a discount and advances you most of the face value — typically 80% to 95% — within 24 to 48 hours, then collects from your customer directly and releases the rest (minus its fee) once the invoice is paid. In practice you are selling receivables you have already earned rather than borrowing, so approval leans on who owes you money and how reliably they pay, not on your personal credit or years in business. That makes factoring a strong fit for companies with slow-paying commercial or government customers and net-30/60/90 terms — trucking, staffing, wholesale, manufacturing, and commercial services — where the work is done but the cash is stuck in accounts receivable.
Key takeaways
- Factoring companies advance 80-95% of an invoice's value up front and release the rest, minus their fee, once your customer pays.
- Approval depends primarily on your customers' credit and payment reliability — not your personal FICO or years in business.
- Individual invoices typically fund in 24-48 hours after your account is set up, though initial onboarding can take days to a couple of weeks.
- Factoring is priced as a discount fee on the invoice, not an APR, and per-diem structures cost more the slower your customer pays.
- Recourse factoring is cheaper but you buy back unpaid invoices; non-recourse costs more and usually only covers customer insolvency, not disputes.
- Factoring requires B2B or government invoices on net terms — it doesn't work for B2C or point-of-sale revenue.
- For irregular invoicing, B2C revenue, or when you can't have a factor contacting customers, a revenue-based advance (min ~$10,000, FICO 500+, 24-48h) is often the better fit.
How invoice factoring actually works, step by step
Factoring turns an invoice into two payments instead of one. Here is the mechanics as it plays out on a real account:
- You deliver and invoice. You complete the job or ship the goods and issue an invoice to your commercial customer on net-30/60/90 terms.
- You sell the invoice. You submit that invoice to the factoring company. They verify the work was completed and the invoice is valid (this is called verification).
- You get the advance. Within a day or two, the factor wires you the advance rate — commonly 80-95% of face value. For example, on a $50,000 invoice at a 90% advance, roughly $45,000 lands in your account up front.
- The factor collects. Your customer now pays the factoring company directly, usually to a designated lockbox. This is called a notice of assignment — your customer is told to remit to the factor.
- You get the reserve. When the customer pays, the factor releases the held-back reserve (the remaining 5-20%) minus its factoring fee.
The critical thing owners underestimate: factoring hands control of collections to a third party that will contact your customers. A professional factor is invisible; a sloppy one can strain a relationship you spent years building. Vet how they collect before you sign.
What factoring actually costs
Factoring is priced as a discount fee on the invoice, not an APR, which makes comparison shopping harder than it should be. Two common structures:
- Flat discount: a single percentage of the invoice face value (for example, 1.5%-5% total).
- Tiered / per-diem: a base fee for the first 30 days, then an additional charge for every extra period the invoice stays unpaid (for example, 1% per 15 or 30 days). The slower your customer pays, the more it costs.
Watch for add-ons that don't appear in the headline rate: application or setup fees, ACH/wire fees, monthly minimums, credit-check fees on your customers, and — with tiered pricing — an open-ended cost if a customer drags to 90+ days. Ask for the all-in effective cost on a sample invoice paid at 30, 45, and 60 days before you compare offers. A cheap-looking base rate with a steep per-diem can end up more expensive than a higher flat fee.
Recourse vs. non-recourse: who eats a bad debt
This single term decides who absorbs the loss if your customer never pays.
- Recourse factoring (most common, cheaper): if the invoice goes unpaid, you must buy it back or swap in another invoice. You keep the credit risk. Lower fees because the factor is more protected.
- Non-recourse factoring (more expensive): the factor absorbs the loss if the customer becomes insolvent. But read the definition carefully — non-recourse usually only covers credit failure (the customer goes bankrupt), not a dispute (the customer refuses to pay because of a quality or delivery issue). Disputes almost always bounce back to you.
Non-recourse is not the blanket protection it sounds like. If most of your risk is billing disputes rather than customer bankruptcy, you may be paying a premium for coverage you'll rarely trigger.
Example: a $50,000 invoice through a factor
These figures are illustrative — for example only, not a quote — to show how the pieces move. Exact rates, advance percentages, and fees vary by factor, industry, and your customer's credit.
| Line item | Amount (for example) | Notes |
|---|---|---|
| Invoice face value | $50,000 | Net-45 to a commercial customer |
| Advance rate (90%) | $45,000 | Wired to you in 24-48 hours |
| Reserve held (10%) | $5,000 | Released after customer pays |
| Factoring fee (for example, 3%) | $1,500 | Deducted from the reserve at payout |
| Reserve released to you | $3,500 | Reserve minus the fee |
Cash-flow read: you accessed roughly $45,000 of earned revenue weeks early, and the cost is the discount taken from the reserve. The math only works if being paid now — to make payroll, buy the next load of materials, or take the next job — is worth more to you than the discount. If your margins are thin and your customers pay on time anyway, factoring can quietly eat the profit on the job.
Decision framework: when factoring fits and when to avoid it
Factoring works best when:
- You sell B2B or to government on net terms and the invoice is for completed, undisputed work.
- Your customers are creditworthy but slow — the gap between doing the work and getting paid is choking your growth.
- You need recurring, predictable access to cash tied to a steady invoice volume (freight brokers, staffing agencies, wholesalers).
- Your own credit or time-in-business would fail a bank, but your customers' credit is strong.
Avoid or reconsider factoring when:
- You sell B2C or take card/cash at the point of sale — there is no net-term invoice to factor.
- Your invoices are irregular, one-off, or small, so monthly minimums and setup make it uneconomical.
- Your customers frequently dispute or partially pay — disputes fall back on you and can trigger recourse buybacks.
- You can't have a third party contacting your customers for reputational reasons.
- Your margins are too thin to absorb the discount, or you simply need a lump sum for equipment or expansion rather than to bridge receivables.
If that last group describes you — inconsistent invoicing, B2C revenue, or a need for a straightforward lump sum against overall sales — a revenue-based advance is usually the faster, simpler fit. It underwrites your bank deposits and total revenue rather than specific invoices, and never puts a third party in front of your customers.
Factoring vs. a revenue-based advance
Both solve a cash-flow gap, but they underwrite different things. Factoring is tied to specific invoices and your customers' credit; a revenue-based advance (a form of merchant cash advance) is tied to your overall deposits and repaid as a small share of daily or weekly revenue.
| Factor | Invoice factoring | Revenue-based advance |
|---|---|---|
| What's underwritten | Specific B2B invoices + customer credit | Your bank deposits and revenue |
| Best for | Steady net-term B2B invoicing | B2C or mixed revenue, irregular invoicing |
| Your credit | Less important | FICO 500+ typically fine |
| Contacts your customers? | Yes — collects directly | No |
| Speed | 24-48h after setup | 24-48h |
| Typical minimum | Tied to invoice volume | From about $10,000 |
Many owners qualify for a revenue-based advance when factoring doesn't fit — because they invoice unevenly, sell direct to consumers, or don't want a factor touching their accounts. A revenue-based / MCA marketplace approves on bank deposits and revenue over credit, with minimums around $10,000, FICO 500+, and funding in 24-48 hours. Approval is never guaranteed — but if factoring's requirements (clean B2B invoices, creditworthy customers) don't describe your business, it's the practical next stop. See the full merchant cash advance overview to compare.
How to choose a factoring company
Once you've decided factoring fits, the factor you pick matters as much as the product. Before signing, get answers in writing on:
- Advance rate and full fee schedule — including the per-diem and every add-on, not just the headline rate.
- Recourse terms — how long before an unpaid invoice bounces back to you, and exactly what non-recourse covers.
- Contract length and volume commitments — avoid long lock-ins and high monthly minimums until you've tested them. Spot factoring (invoice by invoice) is more flexible if available.
- Notification vs. non-notification — whether your customers are told, and how professionally the factor collects.
- Industry fit — a factor that specializes in your vertical (freight, staffing, medical) understands your billing and your customers' payment behavior.
Read the termination clause specifically. Some contracts auto-renew and charge a penalty to exit. The best factor for you is the one whose terms match your invoice volume and whose collections won't cost you customers.
Frequently asked questions
Is factoring a loan?
No. Factoring is the sale of your unpaid invoices, not a loan, so it doesn't add debt to your balance sheet in the traditional sense. You receive an advance against money your customers already owe you, and the factor collects from them directly. Because it's a sale of receivables, approval depends mostly on your customers' credit rather than yours.
How fast can I get funded through a factoring company?
After the initial setup and account approval — which can take a few days to a couple of weeks — individual invoices typically fund within 24 to 48 hours of submission and verification. The first funding is slower because of onboarding; ongoing invoices are fast once your account is live.
What advance rate should I expect?
Most factors advance 80% to 95% of the invoice face value up front and hold the rest as a reserve, released when your customer pays. The exact rate depends on your industry, invoice size, and your customers' creditworthiness. Freight and staffing often see higher advance rates; industries with more dispute risk see lower ones.
Will my customers know I'm using a factoring company?
Usually yes. Most factoring is 'notification' factoring, meaning your customers are told to pay the factor directly via a notice of assignment. Non-notification arrangements exist but are less common and often reserved for stronger accounts. If keeping this private matters to you, ask specifically and consider a revenue-based advance instead, which never contacts your customers.
What's the difference between recourse and non-recourse factoring?
With recourse factoring, you must buy back or replace any invoice your customer doesn't pay — you keep the credit risk, and fees are lower. With non-recourse factoring, the factor absorbs losses if the customer goes insolvent, but it usually doesn't cover invoices unpaid due to a dispute. Read the definition of 'non-recourse' carefully before assuming you're fully protected.
Can I factor invoices if I sell to consumers instead of businesses?
Generally no. Factoring requires a B2B or B2G invoice with net payment terms — there has to be a business customer who will be billed and pay later. If you sell directly to consumers or collect payment at the point of sale, there's no invoice to factor. A revenue-based advance, which underwrites your total deposits and revenue, is the more appropriate option.
How much does factoring cost overall?
Factoring is priced as a discount fee on the invoice rather than an APR, commonly a low single-digit percentage of face value, sometimes with a per-diem that increases the longer your customer takes to pay. Add-ons like setup, wire, and monthly minimum fees affect the true cost. Ask each factor for the all-in effective cost on a sample invoice paid at 30, 45, and 60 days so you can compare offers apples-to-apples.
What if factoring doesn't fit my business?
If you invoice irregularly, sell to consumers, have thin margins, or don't want a third party contacting your customers, a revenue-based advance is usually the better fit. It approves on your bank deposits and revenue rather than specific invoices — typically with minimums around $10,000, FICO 500+, and funding in 24 to 48 hours. Approval is never guaranteed, but the requirements are broader than factoring's.
