What Is Invoice Factoring?
Invoice factoring lets you sell your unpaid B2B invoices to a factoring company for immediate cash, instead of waiting the usual 30, 60, or 90 days for your customer to pay. The factor advances you the majority of the invoice value right away, then collects the full amount from your customer when it’s due — and releases the remaining “reserve” to you, minus their fee.
Unlike a loan, factoring approval is based primarily on your customers’ creditworthiness, not yours — which makes it accessible to newer businesses and those with limited personal credit, as long as they invoice creditworthy B2B clients.
How the Calculation Works
Four numbers determine your outcome, and the calculator above computes each one instantly as you adjust the sliders:
Advance Received Today = Invoice Amount × Advance Rate
Total Factoring Fee = Invoice Amount × Fee Rate × Term Multiplier (NET 30 = 1x, NET 60 = 1.5x, NET 90 = 2x)
Reserve at Collection = Invoice Amount − Advance − Fee
Net Cash From Invoice = Advance + Reserve (equal to Invoice Amount − Fee)
The term multiplier matters more than most business owners expect: a fee quoted as “2.5%” sounds identical whether it’s a NET 30 or NET 90 invoice, but the longer your customer takes to pay, the more that fee compounds in practice — which is exactly what the Effective Annual Cost tile above accounts for.
Recourse vs Non-Recourse Factoring
Almost every factoring agreement falls into one of two structures, and the difference matters a lot if your customer never pays at all.
| Feature | Recourse Factoring | Non-Recourse Factoring |
|---|---|---|
| If customer doesn’t pay | You buy back the invoice | Factor absorbs the loss |
| Typical fee | Lower (1–3%) | Higher (3–5%+) |
| Approval difficulty | Easier | Stricter customer vetting |
| Best for | Established customers with reliable payment history | Newer customer relationships or higher-risk industries |
Common Mistakes to Avoid
Only comparing the headline fee percentage
A 2% fee on a NET 30 invoice and a 2% fee on a NET 90 invoice are not the same cost of capital — the annualized cost of the NET 90 deal is roughly three times higher. Always compare using the Effective Annual Cost, not the raw fee.
Not asking whether it’s recourse or non-recourse
If a customer fails to pay under a recourse agreement, you’re on the hook to buy back that invoice — meaning you’ve paid a fee for an advance you now have to repay in full. Know which structure you’re signing before you factor a risky customer’s invoice.
Factoring your entire receivables ledger unnecessarily
Most factors let you choose which invoices to factor. If only one or two large invoices are creating a cash gap, there’s rarely a reason to factor your entire customer base and pay fees on invoices that were never a problem.
Frequently Asked Questions
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