Invoice factoring is the sale of your unpaid invoices at a discount: a factor advances you 80 to 90% of an invoice's face value now, collects from your customer when it's due, and sends you the remainder minus a fee of roughly 1 to 5% per month outstanding. It's not a loan — and that one fact explains everything unusual about it, including why it's available to businesses that can't qualify for anything else: the underwriting runs on your customers' credit, not yours.
How a Deal Actually Flows
You invoice a customer on net-30 or net-60 terms. Instead of waiting, you sell the invoice to a factor, who advances most of its value within a day or two. The factor then collects directly from your customer — most factoring is "notification" factoring, meaning your customer is told to pay the factor, which is worth knowing before your biggest account finds out from a letter instead of from you. When the invoice pays, the factor releases the reserve (the unadvanced portion) minus its fee. The factor will also file a UCC lien on your receivables — standard, but it must be released when you leave, and a stale one will block your next financing.
One Naming Collision to Clear Up
Invoice factoring and a factor rate are unrelated despite the shared word. A factor rate is the pricing multiplier on a merchant cash advance. Invoice factoring is the sale of receivables. Brokers occasionally let the confusion work in their favor — a business asking about factoring gets pitched an advance "with a great factor rate." Different product, different risk, different math.
What It Costs, Honestly
The quoted fee sounds small — say 3% per 30 days. Annualize it and that's roughly 36%; if your customers pay in 60 days, two fee periods apply. That's expensive money next to a bank line, and cheaper than most advances — and the comparison that actually matters is against what slow receivables are costing you: missed jobs, payroll stress, early-payment discounts you can't take. Factoring also scales automatically with your invoicing, which a fixed loan can't, and the debt never outruns the receivables backing it — the structural reason factored businesses don't end up stacked the way advance-renewers do.
Recourse vs. Non-Recourse — the Clause That Decides Your Risk
Recourse factoring (most common, cheapest): if your customer doesn't pay, you buy the invoice back. You've accelerated cash flow but kept the credit risk. Non-recourse shifts defined credit risk — typically the customer's insolvency — to the factor, at a higher fee, and usually only that defined risk: disputes, returns, and short-pays generally bounce back to you regardless. Read what non-recourse actually covers before paying up for it. Also check whether the contract is spot (factor invoices as you choose) or whole-ledger with minimums and a term — the flexibility difference is enormous and the salesperson will not lead with it.
Who It Actually Fits
Factoring works for B2B businesses with creditworthy customers and real payment lags: contractors waiting on GCs and draw schedules, staffing firms making weekly payroll against net-45 clients, manufacturers and wholesalers selling to chains, freight carriers waiting on broker payments. It does nothing for B2C revenue — no invoices, nothing to sell. And it shines exactly where loans fail: a young business with thin credit but a Fortune 500 customer can factor on that customer's strength. For the right receivables-heavy business, it's often the honest answer to the cash-flow gap that advances paper over expensively.
Frequently Asked Questions
No — it's the sale of an asset (your receivable) at a discount. There's no debt on your balance sheet and no fixed repayment schedule; the factor gets paid when your customer pays the invoice. That's also why approval depends on your customers' credit rather than yours.
Typical advance rates are 80 to 90% of invoice value with fees around 1 to 5% per 30 days outstanding. A 3%-per-month fee annualizes to roughly 36% - cheaper than most merchant cash advances, more expensive than bank credit, and only sensible when measured against what waiting on receivables costs you.
Under recourse factoring you buy back invoices your customer fails to pay - you keep the credit risk. Non-recourse shifts defined risk (usually customer insolvency) to the factor for a higher fee, but disputes and short-pays typically remain your problem either way. Read exactly what non-recourse covers before paying its premium.