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What Is Invoice Factoring?
Invoice factoring is the sale of your unpaid business-to-business invoices to a third party — a “factor” — at a discount. You get 80–95% of the invoice value upfront, usually within 24–48 hours. The factor collects payment directly from your customer. When the customer pays, you receive the remaining balance minus the factor’s fee.
It’s not a loan. There’s no debt on your balance sheet, no monthly payment to make, no personal credit score requirement. The factor is underwriting your customers’ ability to pay — not yours. That’s why a startup with $0 in business credit history can get approved the same day as an established company.
“Invoice factoring” and “accounts receivable financing” are often used interchangeably — and in most cases they describe the same product. The technical distinction: factoring involves the factor collecting payment from your customers directly; AR financing uses your invoices as collateral for a loan you repay yourself. Most small business factoring is the collection-based kind.
How Invoice Factoring Works
You complete work and invoice your customer
The invoice must be for completed work or delivered goods — factors won’t advance on future work. The customer must be a business (B2B), not a consumer. Net-30, net-60, and net-90 invoices all qualify.
You submit the invoice to the factor
Most factors have an online portal or email submission. You submit the invoice, proof of delivery or completion, and the customer’s contact information. Verification takes minutes to hours.
The factor advances 80–95% within 24–48 hours
The advance rate depends on your industry, the customer’s creditworthiness, and the invoice size. Construction invoices often get 80–85%. Staffing and trucking invoices often get 90–95% because payment history is more predictable.
The factor collects from your customer
The factor contacts your customer and collects the full invoice amount. In most factoring arrangements, your customer knows they’re dealing with a factor — this is standard in industries like construction and trucking where factoring is commonplace.
You receive the reserve minus the fee
Once the customer pays, the factor releases the remaining balance (the “reserve”) minus their discount fee. If you advanced $85,000 on a $100,000 invoice at a 2% monthly rate and the customer paid in 45 days, your fee is roughly $3,000 and your reserve release is $12,000.
What Invoice Factoring Costs
Factoring fees are quoted as a discount rate — a percentage of the invoice face value charged per 30-day period the invoice remains outstanding. Typical ranges: 1–2% for creditworthy customers with short payment terms; 3–5% for longer terms or riskier industries.
Cost Example — $100,000 Invoice, Net-60
That’s a 3% total cost for ~55 days of financing. Annualized, that’s roughly 20% APR — significantly cheaper than an MCA at the same timeline, and comparable to a business line of credit without the credit score requirements.
Recourse vs. Non-Recourse Factoring
Recourse Factoring
- Lower discount rate (cheaper)
- More widely available
- If customer doesn’t pay, you buy the invoice back
- You carry the credit risk
- Best when your customers are reliable payers
Non-Recourse Factoring
- Factor absorbs bad debt risk
- Higher discount rate (more expensive)
- Factor is selective about which customers qualify
- Only covers non-payment due to insolvency — not disputes
- Best when customer creditworthiness is uncertain
Most small business factoring is recourse. Non-recourse sounds like full insurance against non-payment, but read the fine print: most non-recourse arrangements only cover credit insolvency (the customer goes bankrupt), not payment disputes or slow payment. If your customer simply refuses to pay or disputes the invoice, you typically still have to buy it back under non-recourse arrangements.
Industries That Use Invoice Factoring
Invoice factoring is not for B2C businesses — retail, restaurants, direct-to-consumer e-commerce. You need business customers with invoiced payment terms. The factor must be able to verify and collect from your customer as a commercial entity.
Factoring vs. Other AR Solutions
| Product | Debt on balance sheet? | Credit score needed? | Who collects? | Cost | Speed |
|---|---|---|---|---|---|
| Invoice Factoring | No | None | Factor | 1–5% per 30 days | 24–48hr |
| AR Financing (loan) | Yes | 600+ | You | 15–30% APR | 1–5 days |
| Business Line of Credit | Yes | 600+ | You | 15–35% APR | 2–7 days |
| Merchant Cash Advance | Yes (UCC lien) | None | Daily ACH | 40–200%+ APR | 24–72hr |
How to Choose a Factor
- Spot factoring vs. contract factoring — Spot (or selective) factoring lets you submit individual invoices as needed with no volume commitment. Contract factoring requires you to factor all invoices from specific customers. Spot gives flexibility; contract often gets a better rate.
- Industry specialisation — Construction factors understand retention and lien waivers. Staffing factors understand payroll cycles. A generalist factor trying to learn your industry costs you time and money. Pick one that speaks your language.
- Notification vs. non-notification — Notification factoring means your customer knows you’ve assigned the invoice to a factor. Non-notification (confidential) factoring keeps the factor invisible. Non-notification costs more and is less common.
- Advance rate and fee structure — Compare total cost (advance rate + discount rate + any admin fees), not just the headline discount percentage. Some factors charge setup fees, wire fees, or minimum volume fees that add up quickly on smaller invoice sets.
- Customer concentration limits — Most factors won’t advance on invoices where one customer represents more than 25–35% of your total factored receivables. If you have a single major client, flag this upfront.
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Frequently Asked Questions
Does my credit score matter for invoice factoring?
No — your personal credit score is essentially irrelevant. The factor is underwriting your customers’ ability to pay, not yours. A startup with no business credit history can get approved the same day as a 10-year-old company, as long as the invoiced customers are creditworthy businesses with a track record of paying. The factor will run credit checks on your customers, not on you.
Will my customers know I’m factoring?
In most standard factoring arrangements, yes — your customers receive a notice of assignment and instructions to remit payment directly to the factor. In industries like construction, staffing, and trucking, this is completely normal and expected. If confidentiality matters for your client relationships, ask specifically about non-notification (confidential) factoring — it’s available but costs more.
What’s the minimum invoice size for factoring?
It varies by factor. Many have minimums of $5,000–$10,000 per invoice or $10,000–$25,000 per month in volume. Some factors specialize in small invoices ($1,000+); others focus on larger commercial accounts ($100,000+). Match your average invoice size to the factor’s sweet spot — a factor built for large invoices won’t price small ones competitively.
Can I factor invoices from government clients?
Yes — government invoice factoring is a specific niche with factors experienced in the Assignment of Claims Act, which governs how federal invoices can be assigned to a third party. State and local government invoices have their own rules. Factors who specialize in government contracting know how to navigate these requirements. Be upfront with any factor that your customers include government entities.
What happens if my customer doesn’t pay?
With recourse factoring (the most common type), you’re required to buy back the unpaid invoice — meaning the advance must be repaid. With non-recourse factoring, the factor absorbs the loss, but only in cases of the customer’s insolvency — not disputes or slow payment. Either way, factoring works best with customers who have a reliable payment history. Most factors will verify customer creditworthiness before advancing on their invoices.
How is invoice factoring different from a business loan?
Invoice factoring is not a loan. You’re selling an asset (your receivable) at a discount — no debt appears on your balance sheet, no monthly payment is owed, and your credit utilization is unaffected. A loan creates a liability. Factoring converts an existing asset into cash. This distinction matters for your balance sheet, your borrowing capacity, and your ability to qualify for other financing simultaneously.
Is invoice factoring right for my business?
Factoring fits businesses that: (1) invoice other businesses on credit terms, (2) have a gap between when they do the work and when they get paid, and (3) want working capital without taking on debt or pledging personal assets. It doesn’t fit consumer-facing businesses, businesses with invoices under dispute, or businesses whose customers are individuals rather than companies. Use the Invoice Factoring Calculator to model the cost against your specific invoice terms.