Invoice factoring is a way for a business to turn unpaid invoices into cash right away. You submit an invoice you have already issued to a factoring company, receive most of its value up front, and get the remainder, minus a fee, when your customer pays. It is built for B2B companies whose customers pay on terms of 30, 60, or 90 days.
How invoice factoring works
- You deliver the product or service and invoice your customer as usual.
- You submit the invoice to the factoring company, which reviews your customer's credit and confirms the work was delivered and billed correctly.
- You receive an advance, which is most of the invoice's value, once the invoice is approved.
- Your customer pays the invoice, typically to the factoring company, on the terms you already agreed.
- The remaining balance is released to you, less the factoring fee.
The point is timing. Nothing about your customer's terms changes, but you stop waiting on them to have cash to run the business. You can read how this plays out in practice on our invoice factoring page.
Is invoice factoring a loan?
No. Factoring is the sale of a receivable you already own, at a discount, in exchange for immediate cash. You are not borrowing against your business, so there is no loan to repay. How a sale of receivables appears in your financial statements is an accounting question, so check with your accountant.
That difference changes who gets approved and why. A lender making a loan wants to understand your company. A factoring company mainly wants to understand your customers, because they are the ones who will pay the invoice.
What a factoring company looks at
- Your customer's creditworthiness. A customer with a strong record of paying on time is the best invoice you can submit.
- Payment history. How long that customer usually takes to pay affects both approval and the fee.
- The invoice itself. It should be for work that was delivered, billed correctly, and not in dispute.
- Concentration. If one customer makes up most of your billing, your cash flow depends on a single payment date, and that is considered.
Because your own financial history carries less weight than it would for a bank loan, newer and fast-growing companies can often qualify when a bank would pass. Our guide on which invoices qualify for factoring goes into the detail.
What invoice factoring costs
Factoring is priced with a fee, and the fee generally depends on how long an invoice stays outstanding. All else equal, a customer who pays in 15 days costs less to factor than one who takes the full 60, so faster payment can reduce the time-based part of the fee.
Because fee structures differ from one provider to another, compare them on a realistic invoice instead of comparing headline percentages. Ask for every fee that could apply, not just the main one, and work out the total cost for an invoice like the ones you actually send. Our guide to how factoring fees work shows how.
When factoring makes sense
- Your customers are other businesses that pay invoices on 30, 60, or 90 day terms.
- Your costs, such as payroll, materials, or fuel, come due well before the invoice is paid.
- You are growing and each new customer adds costs before it adds cash.
- Your customers are creditworthy, even if your own company is young.
It is a weaker fit when your sales are to consumers who pay at the time of purchase, because there is no invoice to finance. It also needs a margin that can absorb the fee, so check the math on thin-margin work before relying on it.
You do not have to factor everything
Most arrangements let you choose which invoices to factor, so you can use it for specific customers instead of all. Some businesses factor only the invoices from customers on the longest terms and let faster payers settle directly.
If you would rather draw cash as needed against your eligible receivables, rather than submitting invoices one at a time, compare it with an A/R line of credit. Our guide on invoice factoring vs. an A/R line of credit walks through how to choose.
Questions to ask any factoring company
- How are fees calculated, and what other charges could apply?
- Is there a minimum volume or a contract term I have to commit to?
- Can I choose which invoices and customers to include?
- How are my customers contacted and told where to send payment?
- How quickly is an approved invoice funded?