Loan type
Invoice factoring: selling your receivables, and what it really costs
Factoring converts unpaid B2B invoices into cash now. It is a sale, not a loan, which has real consequences for your balance sheet and your customers.
At a glance
| What it is | A sale of receivables, not a loan |
|---|---|
| Advance rate | 70% to 90% of face value, sometimes 95% in strong industries |
| Cost | 1% - 5% per 30 days, or roughly roughly 12% - 60%+ annualized |
| Underwriting is on | Your customers' creditworthiness, mostly |
| Recourse | Recourse (you eat unpaid invoices) or non-recourse (factor does, with exceptions) |
| Notification | Usually notified — your customer is told to pay the factor |
| Time to funding | 3 to 10 days to set up, then 24 to 48 hours per invoice |
| Minimums | Many factors want $10,000 to $50,000 a month in invoices |
A good fit when
You invoice other businesses on 30 to 90 day terms, your customers pay reliably, and the gap between doing the work and getting paid is what is choking you.
A poor fit when
You sell to consumers, you are paid at the point of sale, or your customers are slow payers with disputed invoices.
It is a sale, and that matters
You are not borrowing against your invoices; you are selling them. The factor buys the receivable at a discount, advances most of the value immediately, collects from your customer, and remits the rest minus its fee. Because it is a sale, factoring generally does not add debt to your balance sheet, which can matter if you have loan covenants that limit leverage.
You invoice your customer as normal
Say $100,000 on net-60 terms.
The factor advances most of it
At an 85% advance rate, $85,000 lands in your account within a day or two.
Your customer pays the factor
Usually directly, because most factoring is notified — your customer receives a notice of assignment.
The factor remits the reserve, less its fee
At 2% for 30 days, on a 45-day payment you might see roughly $12,000 back of the $15,000 reserve. Your total cost was around $3,000 on $100,000 of revenue.
The cost, honestly stated
Factoring is quoted as a discount rate per period — 1% to 5% per 30 days is the common range. That sounds small and is not. A 3% fee on a 30-day invoice is roughly 36% annualized if you factor continuously.
Watch for these on top of the discount rate:
- Tiered pricing. 2% for the first 30 days then 1% per 10 days after. A customer who pays at day 75 costs far more than the headline suggests.
- Monthly minimum volume fees. Charged whether or not you factor that much.
- Lockbox, wire, ACH, and application fees. Individually small, collectively not.
- Termination and notice periods. Many factoring agreements run twelve months with a 60 or 90 day notice period. Getting out is harder than getting in.
Recourse versus non-recourse
| Recourse | Non-recourse | |
|---|---|---|
| If the customer never pays | You buy the invoice back | The factor absorbs it, usually only for customer insolvency |
| Cost | Lower | Higher, often by 0.5% to 1.5% |
| Availability | Standard | Requires strong customers |
| The catch | The risk stays with you | "Non-recourse" usually excludes disputes, short-pays, returns, and quality claims — which is how most invoices actually go bad |
Read the non-recourse carve-outs carefully. Genuine credit insurance against a customer going bankrupt is a real benefit. Protection that evaporates the moment your customer claims the work was defective is worth much less than it sounds.
Your customers will find out
Most factoring is notified: your customer gets a notice of assignment and pays the factor directly. Some business owners find this embarrassing. In construction, trucking, staffing, and government contracting it is completely routine and nobody blinks. In industries where it is unusual, it can raise questions about your stability.
Non-notification factoring exists, where you continue to collect and remit. It costs more, requires stronger financials, and is not offered by every factor. Ask about it if the relationship optics genuinely matter to you.
Questions people actually ask
Is invoice factoring a loan?
No. It is the sale of an asset — your receivable — at a discount. That is why it generally does not appear as debt on your balance sheet, why your own credit score matters far less than usual, and why there is no interest rate in the conventional sense.
What credit score do I need to factor invoices?
Your score is a secondary consideration. The factor is buying your customers' obligation to pay, so it underwrites them. Businesses with poor personal credit, tax liens, and even recent bankruptcies get approved for factoring regularly, provided their customers are creditworthy.
How is factoring different from invoice financing?
Invoice financing (also called AR financing) is a loan secured by your receivables — you still own them, you still collect, and you repay the advance. Factoring is an outright sale where the factor takes over collection. Financing is more discreet and usually cheaper; factoring is easier to qualify for and removes the collections work from your desk.
Can I factor just one invoice?
Some factors offer spot factoring for a single invoice, at a premium. Most want a committed relationship with monthly minimums because their setup cost per client is significant. If you genuinely need this once, say so up front and shop specifically for spot factoring.