What Is Invoice Factoring?

1. Submit Invoices: Send unpaid invoices to the factoring company. They verify invoices are legitimate and your customers are creditworthy.
2. Receive Advance: Get 70–95% of invoice value deposited within 24–48 hours.
3. Factor Collects Payment: The factoring company handles collections from your customers. Customers pay the factor directly, not you.
4. Receive Remaining Balance: Once customers pay, you receive the remaining 5–30% balance minus factoring fees (typically 1–5% of invoice value).

Recourse Factoring: Most common type. If a customer doesn't pay, you're responsible for buying back the invoice or replacing it with another invoice. Lower fees (1–3% per month). You assume credit risk. Best for businesses with reliable customers.

Non-Recourse Factoring: Factor assumes credit risk. If the customer doesn't pay, the factor absorbs the loss. Higher fees (2–5% per month). Best for businesses with uncertain customer credit.

Invoice factoring is ideal for: B2B businesses with net payment terms, businesses with slow collections (30–90 day delays), companies experiencing rapid growth that outpaces cash flow, and businesses with lower credit scores that don't qualify for traditional loans.

Advantages: Fast cash (24–48 hours), based on customer credit not yours, factor handles collections, scales with sales, no collateral required.

Considerations: More expensive than traditional loans, customers know you're using factoring, requires creditworthy customers, only works for B2B businesses, you lose some control of customer relationships.

Factoring fees vary based on invoice volume, customer creditworthiness, and payment terms. Typical factoring fee: 1–5% of invoice value per month. Advance rate: 70–95% of invoice value upfront.

Example: $10,000 invoice, 2% fee, 85% advance = $8,500 upfront, $200 fee, $1,300 remaining balance.