What is invoice factoring, in plain terms?
Invoice factoring is the sale of your business’s unpaid invoices to a finance company, called a factor, at a discount in exchange for cash now. You deliver the goods or services, bill your customer on net 30, 45 or 60 terms, and instead of waiting, you sell that invoice and get most of the money in a day or two.
Because it is a purchase of an asset and not a loan, the factor cares most about who owes the money. A business with thin profits, a short history or a recent bank decline can still qualify if its customers are creditworthy companies or government agencies. That is why factoring shows up so often when the bank said no or when growth is outrunning the credit you have.
Factoring works for business-to-business and business-to-government receivables. It does not work for consumer receivables, and medical claims billed to insurers are a specialty niche most factors avoid.
Who are the parties in a factoring transaction?
Every factoring deal has three parties: you (the client or seller), your customer (the account debtor), and the factor (the buyer of the invoice). Understanding who owes what to whom clears up most of the confusion owners have going in.
- Some deals add a fourth party: an existing lender, such as a bank or SBA lender, that has a lien on your receivables and must subordinate or carve them out before the factor can buy them.
- Government deals add a step: the factor files a notice under the federal Assignment of Claims Act so the contracting office pays the factor directly.
| Party | Also called | Role in the deal |
|---|---|---|
| Your business | Client, seller, assignor | Does the work, issues the invoice, sells it to the factor, warrants that it is valid and undisputed |
| Your customer | Account debtor, debtor, payor | Owes the invoice and pays it on its normal terms, usually to an account the factor controls |
| The factor | Funder, purchaser, assignee | Buys the invoice, advances cash, verifies, collects, and remits the balance minus its fee |
What happens from application to first funding?
A first funding usually takes about one to three weeks, and most of that time is spent on underwriting your customers, not you. A clean file with a few large, well-known debtors can move in about a week; a file with liens to clear, a factor to buy out or tax issues takes longer.
After the first funding, the cadence speeds up. You submit new invoices with proof of delivery, the factor verifies them, and cash usually lands within 24 to 48 hours.
How are the advance, reserve and rebate calculated?
The advance is the cash you receive up front, expressed as a percentage of the invoice face value. Advance rates commonly fall between 70% and 90%, with 80% to 90% being the middle of the market for ordinary commercial receivables. Staffing and government receivables often sit at the high end; construction progress billings and concentrated ledgers sit lower.
The reserve is the portion the factor holds back, which is simply the face value minus the advance. It protects the factor against short pays, disputes and the fee itself. It is your money, not the factor’s.
The rebate (sometimes called the reserve release) is what you get back after your customer pays: the reserve minus the factor’s fee and any chargebacks. Many factors release rebates weekly or on each payment; some net them against new advances.
When you compare proposals, look at the advance rate and the fee together. A 95% advance with a high fee can cost more than an 85% advance with a lower one, and a low advance can starve your cash flow even when the fee looks cheap.
What fees does a factor charge?
The main charge is the discount fee, a percentage of the invoice face value charged for each period the invoice stays unpaid. Factoring fees commonly run roughly 1% to 5% of invoice value per 30 days, depending on your monthly volume, your customers’ credit and how long they take to pay.
Fees are structured in three common ways: a flat fee for a set period, a tiered fee that steps up every 10 or 15 days, or a daily rate tied to a benchmark such as prime. Around the discount, expect a short list of ancillary charges: setup or due diligence, wire or ACH fees, sometimes lockbox, credit check or minimum volume fees.
Our invoice factoring rates guide breaks down each fee and how to convert any schedule to an annual cost. To run your own numbers, use the factoring cost calculator.
What is verification and notification?
Verification is the factor confirming that an invoice is real, the work was delivered and the customer does not dispute it. It can be as light as matching a signed delivery receipt or timesheet, or as direct as a call or email to the customer’s accounts payable team. Expect heavier verification on early invoices and new customers, and lighter checks once a payment pattern is established.
Notification means your customer is told, usually by a short letter signed by you and the factor, to send payment to a new remit-to address controlled by the factor. Most factoring is notification factoring. Non-notification exists, but it is generally reserved for larger, financially stronger clients. See notification vs. non-notification factoring for the trade-offs.
Your customer does not sign anything that changes its obligations. It pays the same amount, on the same terms, to a different address.
Who collects, and what happens if a customer pays late or not at all?
The factor manages collections on the invoices it owns, which usually means payment posting, statements and polite follow-up on past-due items. Good factors coordinate with you before chasing a customer hard, because they know the relationship is yours.
What happens when a customer does not pay depends on whether the facility is recourse or non-recourse. Under recourse, which is the most common structure, you must buy back or replace an invoice that goes unpaid past a set window, often 60 to 120 days. Under non-recourse, the factor absorbs the loss if the customer becomes insolvent, though usually not if the customer simply disputes the work. Details are in recourse vs. non-recourse factoring.
Late payment, short of default, mostly costs you money: under a tiered or daily schedule, the fee keeps running until the invoice is paid.
What does a factoring transaction look like with real numbers?
Here is a single $100,000 invoice under an illustrative schedule: an 85% advance and a tiered fee of 2.0% for the first 30 days plus 0.5% for each additional 10 days or part of one. The customer pays on day 45.
- Your cost was $3,000 to receive $85,000 about 44 days early.
- Had the customer paid on day 30, the fee would have been $2,000 and your rebate $13,000.
- Had the customer paid on day 75, the fee would have been $4,500 under this schedule, which is why days-to-pay matters as much as the headline rate.
| Line item | Calculation | Amount |
|---|---|---|
| Invoice face value | Billed to customer on net 30 | $100,000 |
| Advance (85%) | $100,000 × 85% | $85,000 paid to you on day 1–2 |
| Reserve held | $100,000 − $85,000 | $15,000 |
| Fee, days 1–30 | 2.0% × $100,000 | $2,000 |
| Fee, days 31–45 | Two 10-day blocks × 0.5% × $100,000 | $1,000 |
| Total discount fee | 3.0% of face value | $3,000 |
| Rebate | $15,000 reserve − $3,000 fee | $12,000 paid to you after customer pays |
| Total cash you receive | $85,000 + $12,000 | $97,000 |
When does factoring make sense, and when does it not?
Factoring fits best when the business is growing, margins can absorb a few points of cost, and the real problem is timing: you pay staff and suppliers now and get paid in 45 to 90 days. It is common in staffing, government contracting, manufacturing, distribution and subcontracting.
It fits poorly when gross margins are very thin, when most invoices are disputed or subject to heavy backcharges, or when the receivables are consumer or medical-insurance claims. If you can get a bank line at bank pricing, that is usually cheaper; our factoring vs. line of credit comparison covers when each one wins.
Facilities that FactorRoute’s funding partners write typically start at $50K and run to $3MM for direct factoring, with larger AR placements up to $25MM. We do not place freight or owner-operator trucking factoring. If you want to see whether your file fits, the Do I qualify? check takes about a minute.
Step by step
- Apply and share your AR agingSend a short application, an accounts receivable aging, a customer list and recent invoices. The factor screens your customers’ credit first.
- Review the proposalCompare the advance rate, fee schedule, ancillary fees, term, minimums and recourse window. Ask for a fee example on a real invoice.
- Clear liens and signThe factor runs a UCC search, files its own financing statement and obtains any releases or subordinations from existing lenders.
- Notify customers and submit invoicesCustomers receive a notice to pay the new remit-to address. You submit invoices with proof of delivery; the factor verifies them.
- Receive the advanceCash for verified invoices usually lands within 24 to 48 hours after the first funding.
- Collect the rebateWhen customers pay, the factor deducts its fee and releases the remaining reserve to you.
Questions people ask
Is invoice factoring a loan?
No. Factoring is the purchase of an asset, your receivables, not a loan against them. You do not carry a loan balance or monthly payment; the factor is repaid when your customer pays the invoice. Some facilities are structured as loans secured by receivables, so read your agreement to know which one you have.
How fast can I get money from factoring?
A first funding commonly takes about one to three weeks, depending on how clean your file is and whether existing liens must be cleared. After setup, verified invoices typically fund within 24 to 48 hours. Small-ticket facilities with lighter underwriting can sometimes fund a clean file in about a week.
Will my customers know I’m factoring?
In most factoring arrangements, yes. Your customers receive a notice to send payment to a new remit-to address controlled by the factor. Factoring is common in many B2B industries, and most accounts payable departments process these notices routinely.
Do I have to factor every invoice?
Not always. Some factors require you to sell all receivables from approved customers, while others allow selective or spot factoring of individual invoices. Whole-ledger arrangements usually earn better pricing because the factor sees more volume and less adverse selection.
What credit score do I need for factoring?
Factors weigh your customers’ credit far more heavily than your personal credit score. They will still look at your background, tax liens, judgments and existing debts, and owners usually sign a validity guarantee. A weak personal score alone rarely disqualifies a business with strong customers.
What is the difference between the reserve and the rebate?
The reserve is the portion of the invoice the factor holds back when it advances cash, for example 15% on an 85% advance. The rebate is what remains of that reserve after the factor’s fee and any deductions are taken out once your customer pays. The rebate is paid back to you.
Can I factor if I already have a bank loan or SBA loan?
Often, yes, but your existing lender usually has a lien on receivables that must be subordinated or carved out first. That is done through a lien release or an intercreditor agreement. FactorRoute regularly routes deals that sit behind an SBA loan.