Looking for a solution to business cash flow issues? If your company uses invoices to get paid, you may be able to use invoice factoring to help solve your problems. 

Invoice factoring, also called accounts receivable financing, is a quick funding option that allows your business to shift payment collection responsibility to an invoice factoring company for a fee. Once you do this, the factoring company will pay you 70 percent to 90 percent of the invoice amount within a few days. You are then free to use the money however your business needs

What is invoice factoring?

Invoice factoring is a short-term alternative financing option for businesses that send invoices to customers. 

Businesses can sell their outstanding invoices to an invoice factoring company. The factoring company pays most of the invoice’s value upfront and takes on the responsibility of collecting the invoice from the client. This allows businesses to receive money from invoices earlier than they normally would, as invoices often take between 30 and 90 days to be paid. 

Companies can use the money from invoice factoring for whatever they need. Once the client pays the invoice, the invoice factoring company will take out their fees and interest and then pay the company any remaining funds they are owed. 

Invoice factoring works for businesses that might not qualify for a traditional business loan because they don’t have the typical loan requirements. Factoring doesn’t require good credit or a traditional loan application process from the business.

Is invoice factoring a loan?

While often lumped in with loan options, invoice factoring isn’t technically a loan. When you sign on to work with a factoring company, they pay you for the invoice and take on the responsibility of collecting payment from the client. 

Also unlike a loan, the factoring company will look at your clients’ creditworthiness instead of your business’s to determine if they will work with you. 

How does invoice factoring work?

The invoice factoring process involves three key parties: the business (you), the client you invoice and the invoice factoring company. 

You will be responsible for the fees associated with the service, which the invoice factoring company will automatically deduct from the client’s payment. Some invoice factoring companies may have hidden fees, so read the fine print before signing an agreement with an invoice factoring company.

These are fees the invoice factoring company may charge you:

  • Interest: Typically 0.5 percent to 4 percent. This may be a one-time fee or may accumulate weekly or monthly while the invoices go unpaid.
  • Late payment fee: Charged if a client pays the invoice after the due date.
  • Returned check fee: Charged if the client’s check bounces.
  • Wire transfer fee: Charged by some companies if the client pays by wire transfer.
  • Origination fee: Sometimes charged when you start a contract with a factoring company.
  • Termination fee: Sometimes charged when you end your contract with the factoring company

Invoice factoring works in a few straightforward steps:

  1. You complete work for the client and send an invoice. 
  2. The invoice factoring company vets the client for creditworthiness. 
  3. If the invoice factoring company approves the client, they will advance you 70 percent to 90 percent of the invoice value. 
  4. The client pays the invoice factoring company directly. 
  5. The invoice factoring company takes out any fees and interest and sends you the remaining amount you are owed from the invoice. 

Here’s an example of what this might look like. 

Invoice value $30,000
Initial advance (90% of invoice value) $27,000
Total interest and fees charged by invoice factoring company (4% of invoice value) $1,200
Additional payment you receive after client pays invoice ($30,000-$27,000-$1,200) $1,800
Total received $28,800

Invoice factoring vs. invoice financing

Invoice factoring and invoice financing are two different ways to receive the funds for an invoice before the client pays. 

Invoice factoring works via a relationship between the invoice factoring company and the client. On the other hand, invoice financing works like a traditional loan, via a relationship between the lender and the business creating the invoice. Invoice financing uses the invoice like collateral for the loan. 

Here are the key differences between the two processes:

Invoice factoring Invoice financing
Lender Invoice factoring company Bank or other loan originator
Party responsible for making payments Client Business
Gets credit checked by lender Client Business
Process – Lender pays business advance
– Client pays lender for invoice
– Lender takes out fees and pays any remaining amount to business
– Business must apply to qualify and gets approved amount of funds from lender
– Client pays business for invoices
– Business pays lender monthly payments or total amount to pay off the loan
Reborrowing Business can keep submitting invoices to the lender until they end an agreement with the lender Borrowing more funds requires applying again with the lender

Invoice factoring pros and cons

Invoice factoring can be a great option if you need money for your business quickly. However, it’s not always the right option. Here are the pros and cons of invoice factoring for you to consider.


  • Quick cash: Traditional business loans can take a few weeks or months to fund. With invoice factoring, you get paid between 70 percent and 90 percent of the invoice value within a few business days. 
  • No impact on your credit score: Invoice factoring may be the right choice if you have bad credit or you just don’t want your credit score impacted. The process relies on the creditworthiness of your clients rather than your business. 
  • More predictable cash flow: Clients who lag in paying invoices can make it hard for you to pay bills on time. With invoice factoring, you can let the factoring company take care of collecting the payments and be certain of what cash you will have and when. 


  • Reduces profit margins: Instead of collecting the total amount of the invoice, you give up any interest and fees that the factoring company charges for their service. 
  • Hidden fees: Some invoice factoring companies may have hidden fees that you haven’t accounted for, resulting in even lower profit margins for you. 
  • Your clients must qualify: Qualifying for invoice factoring relies on your clients’ creditworthiness. If your clients don’t qualify by the factoring company’s standards, you won’t be able to participate in invoice factoring. 

Invoice factoring alternatives

If you decide invoice factoring isn’t the right option for your business, there are other options to consider. Here are some funding alternatives that may be the right choice for your business:

  • Invoice financing: Invoice financing is another way to get advance funding for your business. If you have good credit, this can be another option for your business. 
  • Conventional business loan: Do you need more cash all at once? Consider applying for a business loan. 
  • Business line of credit: If you’d like consistent access to cash, consider a business line of credit. You can use as much (or as little) of your borrowing limit as you wish, and as you pay down your line you have access to that amount again. 
  • Upgrade your invoice management: You may be able to avoid invoice factoring just by upgrading your invoice management process. Invoicing software can make it easy for you to quickly track your invoices and send automated reminders before payments are due. Autopay and online payment methods can make the payment process easy for clients and encourage on-time payments.

FAQs about invoice factoring

  • All you have to do to qualify for invoice factoring is be a company that issues invoices. If you do, the invoice factoring company will look at your clients’ creditworthiness to determine that they want to work with you. 
  • You (the business) pay the factoring fee for invoice factoring. The factoring company automatically deducts the fees when they collect payment from the client. Total factoring fees may vary depending on the factoring company and the agreement you’ve made with them. 
  • No, you do not have to factor every invoice. Invoice factoring companies let you choose which invoices you factor depending on your current financial needs. 
  • Invoice factoring companies typically pay you an advance within a few business days. This advance is usually 70 percent to 90 percent of the total invoice amount. Once the client pays the invoice, the invoice factoring company will then pay you the remaining amount minus any factoring fees. This could take 30 to 90 additional days.