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Factoring can help your business obtain working capital quickly by selling outstanding invoices to a factoring company. By quickly turning your unpaid invoices into cash, you can cope with operational expenses that can’t wait for payment, such as payroll and opportunities to grow your business.
Unlike other financing solutions, factoring small business invoices relies on the client’s creditworthiness, not your own. That makes it an ideal tool for newer companies that work with larger, more established clients and do not have access to traditional bank financing alternatives.
How Small Business Factoring Works
Get the Funds You Need, When You Need Them
Here's how it works:
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Submit Your Invoice
After billing your customer, send a copy of the invoice to the factoring company. The factor reviews your application and processes your request
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Invoice Verification & Credit Check
The factoring company verifies that the invoice is valid and checks your customer’s creditworthiness. This ensures the customer is reliable and reduces the risk of non-payment.
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Advance Payment & Reserve
You receive a cash advance, usually between 70% to 96% of the invoice value. The remainder is held in reserve until your customer pays.
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Final Payout
Once your customer pays the invoice in full, the factoring company releases the reserve balance. Factoring fees and any applicable charges are deducted before the final payment is sent to you.
Costs and Fees
Understanding the Price of Small Business Factoring
The advance rate you receive can depend on several factors. However, depending on your situation, small business invoice factoring can provide more favorable terms than other financing options. For comparison, here is how invoice financing for small business factoring matches up with other financing solutions:
How Small Business Factoring Fees Are Structured
Fee structures can vary depending on the lender and the specifics of your agreement. While the factor rate is the primary cost, lenders may also charge additional fees tied to invoice management, credit checks, or account servicing.
Two common pricing approaches include flat-fee factoring and percentage-of-invoice factoring. Understanding how these structures work helps you anticipate your overall financing expense and manage cash flow effectively.
Here’s a look at how different fee structures can affect the total cost of your factoring arrangement.
EXAMPLE 1:
Your business issues a $10,000 invoice to a customer and decides to factor it. The factoring company offers an 85% advance rate, giving you immediate access to $8,500. The remaining 15% ($1,500) is placed in reserve until your customer pays in full.
The factoring fee (discount rate) is 2.19% per month, which equals $219 for the first month. If your customer pays within 30 days, you receive:
Advance: $8,500 Reserve released: $1,500 Less factoring fee: $219Net payment to you: $9,781
If the invoice remains unpaid after 60 days, this arrangement is full recourse, meaning the unpaid balance is charged back to your business.
At the end of the first month:
Factoring fee: $219 Total cost: $219This structure gives you immediate working capital to cover expenses while waiting on customer payments, with the trade-off of factoring fees and the risk of recourse if your client delays too long.
EXAMPLE 2: Small Business Factoring (Non-Recourse)
Your business issues a $10,000 invoice and factors it under a non-recourse agreement. The factoring company advances 85% upfront ($8,500) and holds back 15% ($1,500) in reserve. Unlike full recourse, your client assumes the risk if the customer fails to pay.
The factoring fee is 2.19% per month, or $219. Because fees accrue the longer it takes to collect, the timing of payment impacts your total cost:
If collected in 30 days: Fee: $219 Reserve released: $1,281 ($1,500 – $219) Net payment: $9,781 If collected in 60 days: Fees: $438 ($219 × 2 months) Reserve released: $1,062 ($1,500 – $438) Net payment: $9,562In this arrangement, the factoring company manages collections and absorbs the loss if the customer defaults. However, the trade-off is higher regarding ongoing costs as fees accumulate with time.
Other charges, such as due diligence fees, monthly minimums, and termination costs, may apply. These vary by factor and should be reviewed carefully before signing an agreement.
Why Your Business Needs Small Factoring Loans
Turn Your Invoices Into Immediate Growth
If your business has outstanding invoices but faces cash flow gaps, small business invoice factoring gives you quick access to capital by converting those receivables into cash. This allows you to cover expenses like payroll and keep operations running smoothly without waiting for client payments.
Invoice factoring for small businesses isn’t a last resort. It’s a flexible financing strategy for many businesses that puts your existing invoices to work. Instead of being held back by slow-paying clients, you gain immediate cash to reinvest in growth, take on new opportunities, or expand operations – without being held back by cash flow constraints.
Best of all, factoring can scale with your business. As your invoicing volume grows, your financing capacity increases, helping your business expand without unnecessary limits.
Don’t let unpaid invoices hold you back. Unlock their value through small business factoring and keep your business moving forward.
Industries That Benefit From Small Business Factoring
Solving Cash Flow Challenges Across Multiple Sectors
Here’s how factoring solutions help businesses in different industries overcome funding gaps and maintain financial stability.
Freight Bill & Trucking Factoring
Staffing, Labor & Payroll Factoring
Manufacturing Financing
Agriculture & Food Production Factoring
Technology & IT Financing
Oil & Gas Financing
Which Model Fits Your Business Needs?
Both small business factoring and asset-based lending provide fast access to working capital, but they differ in flexibility, risk, and how they determine borrowing capacity.
Small Business Factoring
Asset-Based Lending (ABL)
Factoring allows businesses to unlock cash tied up in unpaid invoices. Instead of waiting 30 to 90 days for customers to pay, you receive most of the invoice value upfront, while the factoring company manages collection.
Benefits of Small Business Factoring
Some key advantages include:
- Immediate access to cash without adding traditional debt.
- Approval is based on your customer’s creditworthiness, not your own.
- Scales with your sales volume — the more invoices you issue, the more funding you can access.
- Simplifies cash flow management by turning receivables into predictable cash.
Common Risks Associated With Factoring
While factoring is flexible, it also has challenges:
- Factoring fees may add up if customers take longer to pay.
- Some arrangements are “recourse,” meaning you’re responsible if a client doesn’t pay.
- Customer interactions may be impacted if the factoring company takes over collections.
- Long-term reliance on factoring can limit focus on improving internal cash flow management.
Asset-based lending is a revolving line of credit secured by your company’s assets, such as receivables, inventory, or equipment. Unlike factoring, you remain in control of collections and customer relationships.
Benefits of Asset-Based Lending
Some key advantages include:
- Provides flexible, ongoing access to capital as your asset base grows.
- Typically offers lower financing costs than factoring or cash flow loans.
- Keeps customer relationships private since collections remain in-house.
- Allows borrowing against a broad range of assets, not just invoices.
Common Risks Associated With Asset-Based Lending
While ABL can be cost-effective, it has challenges:
- Requires detailed financial reporting and frequent collateral audits.
- Approval depends on asset quality and overall financial stability.
- Borrowing capacity fluctuates with the value of pledged assets.
- Collateral shortfalls can trigger reduced credit or repayment obligations.
Get Started Here
We’re ready to help you explore invoice financing for small businesses.
Before we can match you with the right solution, we just need a few quick details. One of our dedicated customer service representatives will reach out shortly after we receive your information to guide you through the next steps.
FAQs
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Is small business factoring a loan?
No. Factoring is not a loan; It’s a financing arrangement where you sell your unpaid invoices to a factoring company at a discount in exchange for immediate cash. This means you’re accessing working capital without taking on new debt.
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What happens if my customer doesn’t pay the invoice?
It depends on the type of factoring arrangement. Under recourse factoring, you’re responsible for repurchasing or replacing the invoice if your customer doesn’t pay. With non-recourse factoring, the factoring company absorbs the loss if the customer defaults. However, fees are usually higher for this option.
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Will using factoring make my business look financially unstable?
Not at all. Many businesses use factoring to stabilize cash flow and cover expenses while waiting for customer payments. It’s seen as a practical financing tool, particularly for companies dealing with long payment cycles.
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How quickly can I get funding through factoring?
In most cases, businesses receive an advance within 24 to 48 hours of submitting invoices. Once approved, ongoing factoring becomes a fast and reliable way to access working capital.