Invoice Factoring

What is Invoice Factoring?

Invoice factoring is a financing method where businesses sell their unpaid invoices to a third-party factoring company at a discount in exchange for immediate cash. This allows B2B companies to access working capital without waiting for customers to pay their invoices, which typically have payment terms of 30–90 days.

How Invoice Factoring Works

The factoring process involves four key steps:

1. Submit Invoices: You provide copies of unpaid invoices to the factoring company.
2. Receive Advance: The factor verifies the invoices and advances 70–95% of the invoice value (often within 24 hours).
3. Factor Collects Payment: The factoring company handles collections from your customers.
4. Receive Remaining Funds: Once the customer pays, the factor sends you the remaining balance minus fees.

Example:

• You invoice a customer for $10,000.
• The factor advances $8,500 (85% of the invoice).
• After the customer pays, you receive $1,200 more (the remaining $1,500 minus a 3% fee of $300).
• Total received: $9,700.

How Much Does Invoice Factoring Cost?

Factoring fees typically range from 1% to 5% of the invoice value per month, depending on:

• Invoice amount and age
• Customer creditworthiness
• Your sales volume
• Whether the agreement is recourse (you repay if the customer doesn't) or non-recourse (the factor absorbs the loss, but fees are higher).

Additional fees may include service charges, monthly minimums, or origination fees.

Pros and Cons of Invoice Factoring

Pros:

• Fast access to cash: Get up to 95% of invoice value immediately.
• No collateral required: Invoices secure the funding.
• Easier qualification: Based on your customers' credit, not your business's credit score.
• Outsourced collections: The factor handles chasing payments.
• No debt added: Unlike loans, factoring isn't a liability on your balance sheet.

Cons:

• Costly for slow payers: Fees can add up if customers take longer to pay.
• Loss of control: The factor manages collections, which may strain customer relationships.
• Not for consumer-facing businesses: Only works for B2B invoicing.
• Reduced profit margins: Fees cut into revenue.

Types of Invoice Factoring

1. Recourse Factoring: You repay the factor if the customer doesn't pay (lower fees).
2. Non-Recourse Factoring: The factor bears the loss if the customer defaults (higher fees).
3. Spot Factoring: Finance individual invoices instead of your entire ledger.
4. Whole Ledger Factoring: Requires factoring all invoices (less flexible).
5. Disclosed vs. Non-Notification: Customers know about the factoring arrangement or not.

Industries That Benefit Most

Factoring works best for B2B businesses with invoicing, particularly in:

• Transportation and trucking
• Manufacturing
• Staffing and HR
• Consulting
• Wholesale distribution
• Construction
• Professional services

How to Qualify for Factoring

Requirements typically include:

• Invoices to factor
• Creditworthy customers
• Completed application
• Business bank account
• Tax ID number
• Personal identification

Bad credit isn't necessarily a barrier—factors focus on your customers' ability to pay.

Invoice Factoring vs. Invoice Financing

Feature	Invoice Factoring	Invoice Financing
Control of Collections	Factor handles collections	You retain collections responsibility
Type of Financing	Sale of invoices	Loan using invoices as collateral
Cost	Higher fees (1–5%)	Lower fees (similar to loans)
Best For	Businesses needing full-service	Businesses wanting control over collections

Common Misconceptions

• Myth: Factoring is only for struggling businesses. Reality: Many profitable businesses use factoring to manage cash flow or fuel growth.

• Myth: Customers view factoring negatively. Reality: Customers may not even notice if non-notification factoring is used.

• Myth: Factoring is too expensive. Reality: When used strategically, the benefits (like improved cash flow) often outweigh costs.

Is Invoice Factoring Right for Your Business?

Consider factoring if:

• You have B2B customers with 30–90 day payment terms
• You need immediate working capital
• You can't qualify for traditional loans
• You want to outsource collections

Key Takeaways

• Invoice factoring provides fast cash by selling unpaid invoices at a discount.
• Fees range from 1–5%, depending on customer credit and payment speed.
• It’s ideal for B2B businesses with invoicing but not consumer sales.
• Weigh the pros (speed, no debt) against the cons (cost, lost control).
• Compare factors based on fees, flexibility, and industry expertise.