Invoice Factoring Explained: How It Works, Costs, and Who It Is For

What invoice factoring is

Invoice factoring is selling your unpaid B2B invoices to a factoring company at a discount in exchange for cash now. You get 80–95% of the invoice value within 24–48 hours, the factor collects from your customer on the normal due date, and you receive the remainder minus a fee. It is not a loan: there is no debt on your balance sheet and approval depends on your customers’ creditworthiness, not yours.

How the process works

• You deliver goods or services and issue an invoice with net-30/60/90 terms.
• You submit the invoice to the factor. They verify it with your customer.
• The factor advances 80–95% to your account, usually within a day.
• Your customer pays the factor on the due date (often to a lockbox in your company’s name).
• The factor sends you the remaining 5–20% minus their fee.

What it costs

Factoring fees run 1–5% of the invoice value per 30 days, depending on volume, customer credit, and industry. A $10,000 invoice paid in 45 days at 2% per 30 days costs about $300. Watch for additional charges: application fees, monthly minimums, wire fees, and termination fees on contracts with long commitments.

Recourse vs. non-recourse

• Recourse factoring: if your customer does not pay, you buy the invoice back. Cheaper and far more common.
• Non-recourse factoring: the factor absorbs the loss if the customer goes bankrupt (not if they dispute the work). Costs 0.5–1% more.

Who it fits

• Trucking and freight — the largest factoring market, often same-day on rate confirmations.
• Staffing agencies — payroll weekly, customers pay in 45–60 days.
• Manufacturing, wholesale, and distribution with net-terms customers.
• Government and large-corporate contractors with slow but reliable payers.
• Any B2B business growing faster than its collections.

Who it does not fit

• Restaurants, retail, and other B2C businesses — no invoices to factor.
• Businesses whose customers pay at delivery.
• Companies with heavily disputed or progress-billed invoices (construction uses specialized factors).
• Anyone uncomfortable with customers knowing a factor is involved (though many factors operate discreetly).