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How to compare invoice factoring companies

Small Business
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Key Takeaways

  • Invoice factoring lets you get cash for unpaid invoices in exchange for a percentage of the invoiced amount.
  • Factoring can either be recourse, where you’ll owe the full invoice amount if your customer doesn’t pay, or non-recourse, where the lender takes on the risk.
  • Factoring offers quick cash but can be risky if you rely on it too much or have low margins.

Invoice factoring companies can help improve a small business’s cash flow. These companies purchase your unpaid invoices, giving you anywhere from 70 percent to 90 percent of the invoice’s value within a matter of days. When your client pays the invoice, the factoring company sends you the remaining funds minus any fees.

Invoice factoring can get you cash quickly, and it’s a good fit for small business owners who don’t have time to wait for a client to pay what it owes. But not all invoice factoring companies are the same. To find the right one for you, there are a few steps you’ll need to follow. Here’s what you’ll need to consider when comparing factoring companies.

Types of factoring services

There are a few different types of factoring services, and an invoice factoring company may not offer all of them. Here are the most common types to look for.

Recourse factoring vs. non-recourse factoring

With recourse factoring, you must pay the factoring company back the advanced payment if your customer does not pay an invoice.

With non-recourse factoring, the factoring company is liable for the debt if the client doesn’t pay. Since the factoring company takes more of a risk, non-recourse factoring tends to have higher fees and a lower advance.

Spot factoring vs. whole-ledger factoring

Spot factoring gives you the flexibility to choose what invoices you factor in. Whole-ledger factoring requires you to give the factoring company all invoices.

If you have some customers who pay quickly and others who do not, spot factoring may be the best option. But turning all invoices over to a factoring company saves time on collecting invoices, and you can get advanced quickly for all your invoices.

Notification factoring vs. non-notification factoring

When you use notification factoring, the factoring company is in direct contact with your customers and will send a notice of assignment letter. This lets them know their invoices have been purchased and where to send payment.

Non-notification factoring means the factoring company doesn’t reveal its presence to an invoiced client. When communicating with a client, factoring companies may use stationary with no revealing information or use your logo or other branding. And invoices may be forwarded to a P.O. box instead of being sent directly to an invoice factoring company.

Non-notification factoring is a better fit for small business owners who don’t want their customers to know their invoices were sold. But not all companies will be eligible for non-notification factoring. It generally comes with more restrictions and can take longer to receive funds due to the underwriting process.

How to choose the best factoring company

Choosing the right factoring company is essential. You want to find one that is easy to work with, keeps fees low and offers fast funding. Many factoring businesses specialize in working with companies in specific industries, so also keep that in mind when shopping around.


The first thing to look at when comparing factoring companies is the requirements that each has. It’s not unusual for factoring businesses to require that you have a certain monthly income or have other eligibility rules.

Common requirements include:

  • Your company must be incorporated in the U.S.
  • You must be a B2B company, not a B2C company.
  • You must have a minimum monthly sales volume. $5,000, $7,000, and $10,000 are common minimums.
  • Your customers must have adequate credit.
  • You must offer reasonable payment terms, not too short or too long. 30 days and 90 days are typical minimums/maximums.
  • You must be able to provide financial documents for your business.

Invoice factoring costs

The first fee to watch out for when working with an invoice factoring company is the factoring fee or discount rate. This can range from 1 percent to 5 percent. So if you have a $10,000 invoice with a factoring fee of 2 percent, you would owe a $200 factoring fee to the factoring company.

Factoring fees can be fixed or tiered. Fixed fees stay the same, but in a tiered system, you pay more the longer it takes your customer to pay off the invoice.

For example, if the customer paid a $10,000 invoice in the first week at a 1-percent rate, that would be a $100 fee. But if the customer paid off the invoice in the fourth week, you might see a 3-percent fee, meaning a payment to the factoring company of $300.

Different situations can also change the factoring rate or fee. If the industry is riskier or your clients don’t consistently pay on time, you might see higher fees.

Depending on the factoring company, you might also see additional fees buried in the contract. Some common fees to watch out for include:

  • Application fees
  • Maintenance fees
  • Cancellation or termination fees
  • Due diligence fees
  • Monthly minimum fees

Advance rates

The advance rate is the percentage of your invoices’ value that you will be paid upfront. While this rate often ranges from 70 to 90 percent, you may want to shop around for the best advance. Companies may base your advance rate on your industry and other factors.

Watch out for float days

Once a customer pays, most invoice factoring companies will still require you to continue paying fees for a certain number of days until the funds are credited to the receiver’s account. With a tiered fee structure, that could push you into a higher fee tier and increase your financing costs.

Funding speed

Some invoice factoring companies provide funds faster than others. Depending on the factoring company you choose and how quickly you provide the required information, you could see funds within one to three days. But it could take longer. Some factoring companies have a longer due diligence process and will take time to verify your information and the invoices you submit.

Funding limits

Some companies have funding limits, just as you would experience with a business loan or line of credit. When comparing the best factoring companies, make sure you find one that can offer the amount of funding you need.

Industry expertise

The best factoring company will know the type of industry you work in, its unique challenges and how it relates to collecting payments. Check that the factoring company has experience with your industry by asking or seeing if they list their experience online.

You might also check online reviews or ask for good factoring companies in your industry.

Pros and cons of invoice factoring companies

Invoice factoring brings many benefits, including fast funding and the ability to qualify with less than great credit, but like other alternative loans, there are significant drawbacks to consider.


  • Fast financing. Approval process can be quick and less involved than traditional business loans.
  • Accessibility. Invoice factoring companies look at the creditworthiness of your clients instead of your business. This makes it a good option for new businesses and businesses with bad credit.
  • Free up time. The invoice factoring company handles bill collections, giving you more time to focus on your business.


  • Reduced profits. Paying a fee on your own invoices might not be appealing to some business owners.
  • Low advance rates. Depending on the industry you work in and your clients, you could receive a low advance rate.
  • Hidden fees. Additional costs may be tucked away in your invoice factoring agreement, which can make invoice factoring a less appealing option.

Is invoice factoring right for you?

Invoice factoring is a popular option for many small business owners who invoice business clients. Unlike a traditional business loan, invoice factoring can have an easier approval process. The funding times can also be much quicker, giving you access to immediate working capital.

Plus, invoice factoring doesn’t look at your credit history. So, it’s a good option to consider if you have poor credit and want faster funding than most bad credit business loans.

But it’s not a good fit for every business. If your clients have bad credit or a history of late or missed payments, you may struggle to find an invoice factoring company willing to work with you, or you may have to deal with high fees. If that is the case, a small business loan or alternative business financing option may be a better fit.

Bottom line

Invoice factoring gives you a quick advance payment on your own invoices minus fees. It’s a solid option for small businesses in need of quick funds. Just watch out for fees and follow the above steps to make sure you find the right invoice factoring company for you.

Frequently asked questions

  • Invoice financing lets a business borrow money against outstanding invoices, which act as collateral. The money from invoice financing comes as a line of credit.Invoice factoring involves selling invoices to the factoring company, which advances you a percentage of the invoice amount. Once the client pays, the invoice factoring company releases the remaining funds minus any agreed-upon fees.
  • A major perk with invoice factoring is that your credit score is often not a consideration. Your credit has nothing to do with whether a customer pays an invoice, so invoice factoring is a great option for businesses with bad credit or newer ones with little credit.
  • Invoice factoring is used by businesses that invoice other businesses for goods and services. Some common industries that use invoice factoring include:
    • Transportation industry
    • Healthcare industry
    • Technology industry
    • Wholesale and distribution industries
    • Staffing industry

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