What Is Invoice Factoring?

Invoice factoring is not a loan. Instead, it’s a way to turn unpaid customer invoices into fast cash.

Here’s how it works:

• You sell your invoices to a third party (called a factor) for less than their full value.

• The factor gives you an advance, usually 85%–95% of the invoice amount.

• The factor then collects payment directly from your customer.

• Once the customer pays, you get the rest of the money—minus the factor’s fees.

This option is especially helpful if your customers take weeks (or months) to pay, but you need cash right away.

Why Businesses Use Factoring

• Fast access to cash (funding often arrives in 1–3 days)

• No need to put up other collateral (the invoices themselves act as security)

• Useful for businesses with limited credit history or assets

• Popular in industries like manufacturing, textiles, transportation, and wholesale—where long payment cycles are common

How Factoring Works

• Apply with a factoring company (banks and independent finance firms also offer it).

• The factor reviews your clients’ creditworthiness—not just your own business.

• If approved, you sell invoices to the factor, typically for 85%–95% of their value.

• The factor advances you cash within a few days.

• When your customer pays the invoice, the factor deducts its fees (usually 2%–4.5% per 30 days) and sends you the balance.

👉 Important: The factor has the legal right to contact your customers directly for payment.

Example of Factoring

Imagine you own a restaurant supply company. A client owes you $20,000, but they won’t pay for 60 days. You need money now to buy equipment for another order.

Instead of waiting, you sell the $20,000 invoice to a factoring company for 90% ($18,000). You get that cash right away. When your client pays, the factor keeps its fee and sends you the remaining balance.

Types of Factoring

• Recourse factoring (most common):
  If your customer doesn’t pay, you’re responsible for covering the unpaid invoice.

• Non-recourse factoring:
  The factor takes on the risk if the customer fails to pay. Since this is riskier for the factor, fees are usually higher.

Pros and Cons of Factoring

Pros:

• Quick access to working capital

• No new debt or equity given up

• Keeps your cash flow steady so you can grow

Cons:

• Can be more expensive than traditional loans or credit lines

• Factor collects directly from your customers (some business owners don’t like this)

Is Factoring Right for Your Business?

Factoring may be a good fit if:

• Your business relies on B2B invoices with long payment terms

• You have slow-paying customers

• You need fast cash to cover expenses or support growth

To qualify, factoring companies mainly look at your customers’ payment history, not just your credit. If your clients have a track record of paying on time, approval is much easier.

Bottom Line

Invoice factoring is one of the oldest and most reliable ways businesses improve cash flow. It’s not debt—it’s a cash advance on money you’ve already earned. Just make sure you fully understand the fees and terms before signing a factoring agreement.