Authored by Phil Cohen
Invoice factoring is a financing method where a business sells its unpaid invoices to a factoring company in exchange for immediate cash—typically 80–95% of the invoice value.
This gives small businesses faster access to working capital without taking on debt.
In other words, factoring converts slow-paying invoices into same-day liquidity, helping companies cover payroll, expenses, and growth needs.
Key Characteristics of Invoice Factoring
1. It Is Not a Loan — It Uses Your Existing Invoices
Invoice factoring does not require collateral, long credit history, or debt.
Your invoices act as the primary funding asset.
Example: A $20,000 invoice could fund $18,000 today.
2. Approval Is Based on Your Customers’ Credit
Unlike traditional financing, factoring companies evaluate the creditworthiness of your clients, not just your own.
Why it matters: Startups and businesses with weak credit often qualify.
3. Funding Happens Fast (Often Within 24 Hours)
Once invoices are verified, factoring providers advance cash quickly.
This solves cash flow gaps caused by slow-paying customers.
4. Factoring Companies Handle Payment Collection
The factor manages:
Payment tracking
A/R reporting
Payment posting
This reduces administrative burden and improves collection visibility.
5. Costs Are Based on Time, Volume, and Client Risk
Typical 2026 factoring fees:
1.5%–4% per 30 days
Advance rate: 80–95%
Reserve: 5–20%
How Invoice Factoring Works (Step-by-Step)
Step 1: You Complete Work and Issue an Invoice
The customer approves the invoice according to your standard terms (Net 30, Net 45, etc.).
Step 2: You Submit the Invoice to a Factoring Company
The factor verifies the invoice and checks the customer’s credit history.
Step 3: You Receive an Advance of 80–95%
Funding occurs in as little as 24 hours.
This becomes immediate working capital.
Step 4: Your Customer Pays the Factoring Company
Payment flows directly to the factor according to your customer’s original terms.
Step 5: You Receive the Remaining Reserve Minus the Fee
After payment is collected:
The factor releases the reserve
Subtracts the factoring fee
Closes the transaction
Simple example:
Invoice: $10,000
Advance: 90% ($9,000)
Fee: $250
Reserve returned: $750
Common Misconceptions About Invoice Factoring
Myth 1: “Factoring is only for struggling businesses.”
Reality: Many fast-growing businesses use factoring to support rapid scaling and expansions.
Myth 2: “Clients will think I’m in financial trouble.”
Reality: Large enterprises use vendor financing daily; it’s standard practice in B2B markets.
Myth 3: “Factoring is too expensive compared to loans.”
Reality: Factoring is often cheaper when you consider:
No long-term debt
Approval speed
Less administrative overhead
Funding flexibility tied to sales
Myth 4: “It’s complicated.”
Reality: Factoring is one of the simplest forms of working capital financing.
Practical Applications: Why Factoring Matters in 2026
1. Covers Cash Flow Gaps from Slow-Paying Customers
Common in staffing, manufacturing, and B2B service firms.
2. Enables Consistent Payroll
Especially important for staffing and seasonal businesses.
3. Supports High-Growth Companies
Factoring scales with your invoice volume—no need to reapply for higher limits.
4. Reduces Administrative Burden
Factoring companies provide A/R tracking, credit checks, and payment management.
5. Helps Startups Access Capital Faster
Factoring is often the only financing available to new businesses without collateral.