Invoice factoring services let a business sell its unpaid customer invoices to a factoring company for cash now instead of waiting 30, 60 or 90 days to get paid. You do the work, send the invoice, and the factor advances most of the invoice value within a day or two. When your customer pays, the factor sends you the rest, minus its fee. It is not a loan, so approval depends far more on your customers’ credit than on yours.
That last point is why factoring works for companies that banks turn down: young businesses, fast-growing businesses, and owners with bruised credit who sell to solid commercial or government customers. Below is how it works, what it costs, and what to check before you sign with anyone.
How invoice factoring works, step by step
- You invoice your customer as usual for work already completed or goods already delivered.
- You submit the invoice to the factor. They verify it with your customer and confirm the customer’s credit.
- The factor advances 70% to 90% of the invoice amount, usually within 24 to 48 hours. Staffing and trucking invoices often get the high end of that range.
- Your customer pays the factor on its normal terms, typically to a lockbox or account the factor controls.
- The factor pays you the reserve (the remaining 10% to 30%) minus the factoring fee.
Example: you factor a $50,000 invoice with an 85% advance and a 3% fee for 30 days. You get $42,500 up front. Your customer pays in 30 days, the factor keeps $1,500 and sends you the remaining $6,000. Your total cost was $1,500 to get $42,500 a month early.
What invoice factoring really costs
Factoring fees usually run 1% to 5% per 30 days the invoice is outstanding. Where you land depends on your monthly volume, your customers’ credit, your industry and how long your customers take to pay. The fee is only part of the price, though. Compare these too:
- Fee structure. A flat fee (for example 3% if paid within 60 days) is easy to predict. A tiered fee (for example 1.5% per 15 days) grows the longer your customer takes.
- Extra fees. Application, due diligence, ACH or wire, lockbox, credit check, and invoice processing fees can add up. Ask for every fee in writing.
- Minimums and contract length. Some factors require a monthly minimum volume and a 12-month contract with an early termination fee.
- Whole ledger or spot factoring. Whole ledger means you factor all invoices from a customer (lower rates). Spot factoring lets you pick single invoices (more flexible, higher rates).
Run the numbers on one real invoice from each offer. The lowest headline rate is not always the lowest total cost.
Recourse vs. non-recourse factoring
With recourse factoring, if your customer doesn’t pay, you buy the invoice back or replace it. Rates are lower because you carry the risk. With non-recourse factoring, the factor absorbs the loss, but read the fine print: most non-recourse agreements only cover a customer’s bankruptcy or insolvency, not a slow payer or a billing dispute. Non-recourse also costs more. Plenty of businesses pay extra for non-recourse protection they would rarely use.
Who invoice factoring is a good fit for
- B2B and government contractors waiting on net-30 to net-90 terms.
- Staffing agencies that pay workers weekly but get paid monthly. See our guide to payroll funding for staffing firms.
- Trucking and logistics companies covering fuel and drivers between loads.
- Manufacturers and distributors buying materials for the next order before the last one is paid.
- Growing companies whose sales are outpacing their cash.
Factoring does not work for businesses that sell to consumers, invoices for work not yet completed, or invoices to customers with poor payment histories.
Common misconceptions about factoring
“Factoring is only for businesses in trouble.” Not true. Many profitable, fast-growing companies use it because growth eats cash. Large companies sell receivables all the time; they just call it receivables financing.
“My customers will think I’m going under.” In most industries factoring is routine, and your customer simply sends payment to a new address. If customer notification is a concern, ask about non-notification programs, which some factors offer to stronger clients.
“Factoring is a loan.” It’s a sale of an asset (the invoice). There’s no loan payment on your books. Factors do file a UCC lien on your receivables, though, which can matter if you already have a bank line of credit or a merchant cash advance.
Factoring vs. other working capital options
If your customers pay reliably but slowly, factoring is often cheaper and safer than a merchant cash advance, which takes daily or weekly payments from your bank account whether or not your customers have paid you. If you have two or more years in business, solid credit and clean financials, a bank or non-bank line of credit may cost less than factoring. We compare the two in invoice factoring vs. a business loan.
What you need to apply
- A short application and a copy of your accounts receivable aging report
- Sample invoices and, for some industries, proof of delivery or signed timesheets
- A list of the customers you want to factor
- Your articles of incorporation and a government ID for the owners
- Proof that payroll taxes are current (factors check this, because unpaid payroll taxes come ahead of them)
How to choose an invoice factoring service
Get at least two or three written proposals and compare the total cost on the same invoice, the advance rate, the reserve release timing, the contract term and termination fee, and whether they work in your industry. A good factor will answer every one of those questions in writing before you sign.
Liberty Capital Group has arranged business funding since 2004 and works with factoring companies that specialize in staffing, trucking, manufacturing, government contracting and more. We’ll match you to the right program and show you the full cost up front. Learn more about our invoice factoring programs, or get a quote in a few minutes. Questions? Call (888) 511-6223.
Invoice factoring FAQ
How fast can I get funded?
Setting up a new factoring account usually takes 3 to 7 business days. After that, invoices are typically funded within 24 to 48 hours.
Can I use factoring with bad credit?
Often, yes. The factor is mainly underwriting your customers. Tax liens, unpaid payroll taxes or an existing lender with a lien on your receivables can be bigger obstacles than your credit score.
Do I have to factor all of my invoices?
No. Spot factoring lets you choose individual invoices, though whole-ledger programs usually come with lower rates.