Get Paid on Your
Invoices — Now.

How Invoice Factoring Works

Invoice factoring is a financing method where a business sells its outstanding invoices (accounts receivable) to a factoring company at a discount in exchange for immediate cash. Instead of waiting 30, 60, or 90 days for your customers to pay, you receive a large portion of the invoice value within 24–48 hours.

The key distinction: factoring is not a loan. You're selling an asset (your receivables) rather than borrowing against them. This means no debt added to your balance sheet, no fixed repayments, and no collateral beyond the invoices themselves.

Invoice Factoring Step by Step

1. Submit invoices — you provide copies of outstanding invoices to the factoring company
2. Verification — the factor verifies the invoices with your customers (called debtors)
3. Advance payment — the factor advances 80–95% of the invoice value within 24–48 hours
4. Customer pays the factor — when your customer pays their invoice on the original due date, they pay the factoring company directly (not you)
5. Reserve released — once the customer pays, the factor releases the remaining balance (5–20%) minus the factoring fee

Example: You factor a $100,000 invoice with an 85% advance rate and a 3% factoring fee. You receive $85,000 upfront. When your customer pays in 45 days, you receive $12,000 ($100,000 − $85,000 − $3,000 fee = $12,000 reserve).

Invoice Factoring Rates and Fees

Total cost depends on how quickly your customers pay. The longer invoices remain outstanding, the higher the effective rate. Factoring is most cost-effective when your customers pay within 30–45 days.

Invoice Factoring vs. Invoice Financing

These two terms are often confused — but they work very differently:

Many businesses prefer factoring because the factor assumes the collection responsibility. Invoice financing keeps collections in-house but adds to your debt obligations.

Who Uses Invoice Factoring?

Invoice factoring is specifically designed for B2B (business-to-business) companies that bill other businesses or government entities on credit terms. Common users:

• Staffing agencies: Fund payroll while waiting on 30–60 day staffing invoices
• Contractors and subcontractors: Cover labor and materials costs between project billings
• Freight and trucking companies: Factor freight bills to cover fuel, driver pay, and maintenance costs
• Distributors and wholesalers: Bridge the gap between inventory purchase and customer payment
• Manufacturing companies: Fund raw material purchases while production orders are processed
• Service businesses: Consulting, IT services, cleaning, and other service firms billing on net terms

Invoice factoring is not suitable for B2C (business-to-consumer) businesses. Consumer-facing businesses with revenue from retail sales, restaurants, or walk-in services should consider merchant cash advances or working capital loans instead.

Invoice Factoring Requirements

Frequently Asked Questions: Invoice Factoring