Invoice Factoring & Financing Services | Business Factors
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Invoice Factoring

Invoice factoring is a tool to accelerate cash flow by selling your invoices to a factor, which is a type of finance company that specializes in such transactions
  • It relies on creditworthiness of your client, not your own
  • In the U.S. alone, around $120 billion worth of invoices are factored every year
  • Factoring is not lending and allows a business to obtain funds in 24-48 hours

What is invoice factoring?

Invoice factoring – also known as accounts receivable factoring or simply, factoring – is a tool to accelerate company’s cash flow by selling accounts receivables to a factoring company, which is a type of finance company that specializes in such transactions. It is a flexible and fast tool for both large and small and medium-sized enterprises (SMEs) alike and empowers them to accept more work by freeing up working capital.

By monetizing pending invoices, a business can take advantage of bulk discounts when purchasing supplies, fund snowballing expenses associated with rapid growth or take on a large project that requires an upfront investment.

The big advantage of factoring is that relies on the creditworthiness of the client, not your own. This makes it an ideal tool for startups that work with larger, more established clients and do not qualify for a bank loan. As an added bonus, factoring companies can take over invoicing and collections for you, allowing you to focus on running your business instead.

Factoring can be a good alternative if: a) your business is working with clients that are taking longer to pay, b) you are taking on debt to fund expenses, 3) you spend too much time invoicing and collecting.”

How does invoice factoring work?

Invoice Factoring can be done in four simple steps:

  1. The business provides a factor with a copy of the invoice that was sent to business‘s client
  2. The factor verifies the invoice and runs a credit check on that client
  3. The factor advances a portion of the outstanding amount and holds the rest as reserve
  4. Once the invoice is paid, the business gets the remainder minus the discount rate and any additional fees

How much does it cost?

The answer to this question would depend on the exact arrangement the business has with the invoice factoring company. The advance rate on an invoice is typically between 70% and 96% and depends on the industry, client’s creditworthiness, how many invoices the business is looking to factor and their dollar amount, among other things. When choosing a factor, it is important to pay attention to the fine print disclosing the fees that a factor charges. Some may charge fees associated with monthly minimums, due diligence and maintenance or lockbox fees.

Here are some examples.

Example 1

  • Invoice amount: $100,000
  • Advance rate: 85%, or $85,000
  • Reserve: $15,000
  • Fees: Monthly fee of 3% charged on the 1st of every month, due diligence fee of $200
  • Type of arrangement: Full recourse after 90 days

In this scenario, the client would pay $3,000 per month plus a one-time due diligence fee ($200). If, however, after 3 months, the invoice is still outstanding, the factor will charge it back to the client. The disadvantage of this arrangement is that the monthly fee is charged in the beginning of the month. Thus, if an invoice is paid after 5 weeks, the business would still pay $600 or 6%.

Example 2

  • Invoice amount: $100,000
  • Advance rate: 85%
  • Reserve: $15,000, or 15%
  • Fees: Weekly fee of 0.75% ($750), due diligence fee of $200
  • Type of arrangement: Full recourse after 90 days

This example might look the same as the above. But the business would actually save money in this arrangement if the invoice is paid during the month. If it is paid after 5 weeks, just like in the scenario above, the client would only pay $3,750 ($750*).

Why does your business needs factoring?

Below are a few of the top reasons why invoice factoring may make sense for your business:

  • You are working with a large client that commands longer net terms or have several clients that are taking longer to pay. The slow turnover may cause you to delay making important investments necessary that will grow your business, hiring staff, pursuing new clients or buying equipment necessary to complete another client’s order on time
  • You are taking on debt to fund expenses or having cash flow problems while waiting for invoices to be paid. Using a credit card to fund expenses might be convenient but, with the average business credit card APR of close to 18%, factoring can be an attractive alternative
  • You spend too much time on invoicing and collections. Factoring companies can take over accounts receivable management for you

What industries are good candidates for invoice factoring?

Factoring can be an optimal solution for many business-to-business (B2B) companies both in the startup and mature stages as long as they have creditworthy clients. Business-to-consumer (B2C) businesses are generally not good candidates for invoice factoring because of the higher risk profile of their clients.

Some of the industries that can benefit from invoice factoring are listed below.

  • Information Technology
  • Freight and trucking
  • Agriculture
  • Businesses working with government
  • Manufacturing
  • Oil and Gas
  • Payroll and staffing
  • Telecom

Types of factoring

Recourse financing is similar to a short-term loan. If after a specified period the lender is not able to collect on the invoice, the invoice is charged back to the borrower who can pay it back or replace it with another one from a creditworthy client. This type of financing – which tends to feature lower fees – is good for factoring invoices of clients with whom a business has a long-standing relationship.

Conversely, in a non-recourse factoring situation, the receivables are sold to the factor who then becomes responsible for collection. Non-recourse factoring is beneficial because it transfers the credit risk to the factor in return for accepting the arrangement, the factor charges a higher discount rate than it would in a recourse factoring situation.

Factoring does not increase a business’s leverage and is not necessarily more expensive than a line of credit. Most B2B business owners can benefit from monetizing invoices to help grow their business.”

Common misperceptions associated with factoring

  • Factors are lenders. Unlike lending, factoring does not increase business’s leverage and does not require a long-term commitment. A loan, on the other hand, increases a business’s debt burden and requires the payment of interest that can eat into a company’s cash flow for several years. SMEs can also have a harder time qualifying for loans that stipulate minimum credit scores and require collateral as well as numerous financial and legal documents. Factoring, on the other hand, relies on the credit score of your business’s clients and requires dramatically less paperwork. That being said, recourse factoring is akin to a short-term loan in that, if after a specified period of time, the factor is not able to collect on the invoice, it is charged back to the client who can choose to pay it back or replace with a new one. Business Factors provides non-recourse factoring where we purchase your receivables and there is no chargeback if we are unable to collect.
  • It is more expensive than a line of credit. Actually, it depends on the arrangement a business has with a factoring company. In a recourse arrangement, fees can be lower than a non-recourse one since the factor is taking on less risk. Additionally, fees and reserve rates can be lower for certain types of businesses that have a lower probability of their invoices not getting paid. These include trucking or staffing companies that would normally have a higher advance rate than retailers, for example. For more details, see our Small Business Factoring page. A business can get its invoices factored in as little as 24 hours. Unlike banks, factors typically do not place restrictions on the use of proceeds and do not require compliance with covenants restricting debt, acquisitions and mandating financial performance. With Business Factors, you can get started in four minutes by filling out an application.
  • Invoice Factoring companies are collection agencies. Untrue. Factors help you manage collections for the invoices they’ve advanced but they cannot serve as a collector for your defaulted invoices. In fact, factors would conduct a credit check on your client before agreeing to advance part of the invoice to minimize the risk of non-payment.
  • Factoring companies are financiers of “last resort.” While factors can sometimes play that role for distressed companies with nowhere to turn, most business owners can benefit from using the invoices that have been sitting around for months to help grow their business. In addition to collecting invoices, factors can offer other back office services, such as invoice preparation and processing.
  • Factoring will sour my relationship with clients. Most businesses are aware of factoring arrangements and understand that they are an efficient way to increase working capital. Additionally, in some cases, your client might not be aware that an invoice factoring company has taken over the collections. This might be the case if your client mails payment to a lockbox that was set up for that purpose.


Factoring is a $120 billion industry in the U.S alone and can be a powerful tool for small and medium-sized enterprises looking to tap into their invoices to fuel growth, make investments for new projects or smooth out cash flow during a downturn or when working with large clients who command longer net terms. Unlike a bank loan – that can have stringent eligibility and usage requirements – factoring requires dramatically less paperwork and can turn invoices into cash in as little as 24 to 48 hours. Factoring can be done on a recourse or non-recourse basis. In the first case, the business gets the invoice charged back if it is not paid within a specified period of time. With non-recourse factoring, factor purchases the invoice taking it off client’s balance sheet. Advance rate on factored invoices ranges between 70% and 96% depending on the industry and your client’s creditworthiness, among other factors. Factors are not lenders or collection agencies for defaulted invoices (even though they do collect on the receivables they factor) and using invoice factoring companies does not negatively impact your relationship with your clients.

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