Authored by Phil Cohen
This guide shows you how invoice factoring works and how growing businesses can use it to turn unpaid invoices into same-day working capital.
Factoring advances 80–95% of invoice value within 24 hours, making it ideal for companies facing long client payment terms, rapid expansion, or cash flow gaps. The process is straightforward—and understanding each step helps you maximize value and avoid surprises.
Before You Begin, You’ll Need:
A/R aging report
Copies of approved customer invoices
Client payment terms (Net 30–60)
Business formation documents
Tax ID and bank account
Optional: list of slow-paying or high-volume clients
How Invoice Factoring Works: 7-Step Process
Step 1: You Complete Work and Issue the Invoice
Factoring begins after work is performed or goods are delivered.
Your customer must approve the invoice or timesheet.
Why this matters:
Only verified invoices can be funded—this protects both parties from disputes.
You’ll know this worked when: Your customer confirms delivery or hours.
Step 2: Submit the Invoice to a Factoring Company
You send:
Invoice
Backup documents (PO, signed timesheet, delivery confirmation)
Customer information
The factoring company reviews the invoice and evaluates your customer’s creditworthiness.
Insight: Approval is based primarily on your customers, not your business credit.
Step 3: The Factoring Company Approves the Invoice for Funding
The factor confirms:
Customer is creditworthy
Invoice is valid
No liens or prior claims exist
Terms match industry norms
Common approval types:
General approval: Any invoice from this customer
Invoice-by-invoice approval: Higher-risk or new customers
Step 4: You Receive an Advance of 80–95%
Once approved, funds are deposited—usually within 24 hours.
Advance rates vary by industry and client quality.
Typical 2026 advances:
Staffing: 90–95%
Manufacturing: 85–92%
Transportation: 80–90%
B2B services: 85–95%
Why this step matters:
This is the key cash flow benefit—immediate liquidity without waiting 30–60 days.
Step 5: The Factor Manages Collections and Tracks Payment
The factoring company handles:
Payment routing
Statement delivery
Payment posting
Light follow-up
Real-time reporting
Note: Factoring does not harm client relationships; B2B vendors use similar systems regularly.
Advantage: Your A/R workload decreases significantly.
Step 6: Your Customer Pays the Factoring Company
The customer pays the invoice directly to a secure remittance address managed by the factor.
This ensures accurate tracking and faster reconciliation.
Payment timing examples:
Net 30 → paid in 30 days
Net 45 → paid in 45 days
Net 60 → paid in 60 days
Growing businesses benefit because:
Cash flow becomes predictable, even if customers pay slowly.
Step 7: You Receive the Remaining Reserve Minus the Factoring Fee
After the factor receives full payment, they release the reserve (typically 5–20%) minus the factoring fee.
Example:
Invoice: $20,000
Advance: 90% ($18,000)
Fee: 2.5% ($500)
Reserve returned: $2,000 – $500 = $1,500
You’ll know it worked when:
Your total received equals the invoice minus the agreed fee.
Why Growing Businesses Use Invoice Factoring
1. Rapid Scaling Requires Rapid Cash Flow
More customers = more invoices = more payroll and materials.
Factoring keeps cash aligned with growth.
2. Predictable Cash Makes Planning Easier
Budgeting and forecasting improve when you know invoices convert to cash quickly.
3. Approval Is Easier Than Bank Financing
Perfect for:
New businesses
Companies with limited credit
Firms with high customer concentration
Seasonal or project-based work
4. Removes the Strain of Chasing Payments
The factor handles payment tracking so you can focus on sales, hiring, and delivery.
Common Issues and Solutions
Issue: Customer pushes back on paying a factoring company
Solution: Provide a simple explanation—large companies use third-party payment management systems frequently.
Issue: Advance rate is lower than expected
Solution: Increase volume or build longer history with the factor to earn higher advances.
Issue: Fee seems unclear
Solution: Request a full written breakdown (rate, reserve, minimums, any add-ons).
Next Steps
Collect your most recent invoices
Identify slow-paying customers
Estimate your weekly or monthly cash needs
Compare factoring providers specializing in your industry
Submit your first invoice for approval