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Also known as accounts receivable financing, invoice factoring and financing allow you to get an advance on your business’s unpaid invoices.
Narrow down top factoring companies by requirements and advance amounts to find the best for your business. Select Compare for up to four products to see their benefits side by side.
We update our data regularly, but information can change between updates. Confirm details with the provider you’re interested in before making a decision.
Invoice factoring is a type of short-term business financing where businesses sell unpaid invoices at a discount to a factoring company. This type of advance is available to business-to-business (B2B) and business-to-government (B2G) companies with invoices from $10,000 to $10 million due within 30 to 90 days.
Because factoring companies buy a small business’s invoices up front, they aren’t technically lenders. Instead of paying interest, factoring companies charge a fee that’s typically equal to a percentage of your total invoices. This means you won’t ever receive the full value of your invoices with this service.
Factoring might be an option if you’ve struggled to qualify for financing from traditional lenders due to cashflow problems, the industry you’re in or your credit rating.
This is a popular choice for expanding companies that want a long-term solution for their invoice factoring. With whole turnover factoring, businesses are typically required to sign up for at least 12 months of factoring on all invoices they receive during that period. Since you’re signing up for the long haul, many factoring companies often charge lower fees for whole turnover financing.
Lower rates and fees than shorter-term factoring arrangements.
May provide additional credit and debt collection services.
Less flexibility, invoices are typically financed in the order they’re received.
Locked into a contract for at least a year.
Selective invoice factoring
Selective invoice factoring lets businesses choose which invoices to factor and which they’d like to handle themselves. It allows companies to account for several factors that can affect income — such as the time it takes individual customers to pay invoices, peaks in trading and unique agreements with specific customers.
Like whole turnover factoring, selective also usually involves a year-long contract. However, it allows you to choose which invoices you finance and when. These features make this brand of factoring a sound option for small businesses with diverse clients and customers. But it can be more expensive.
Save by leaving out invoices they expect to be paid quickly.
Maintain your relationship with some customers.
Typically higher rates than those offered by whole turnover factoring.
Doesn’t allow for the same hands-off approach as whole turnover.
Spot factoring
If your company needs income quickly, possibly to cover a one-time payment or meet the monthly payroll, you might consider spot or single factoring. This is for when you’re looking to access the funds from one invoice or a single load as quickly as possible.
Keep in mind that the speed of this type of invoice factoring is reflected in the costs, which are the highest out of these three choices. The short period makes this type of invoice factoring less profitable for the lender, who may charge you weekly or even monthly for just a few hours of work.
No long-term commitments.
Choose when you want to sign up for factoring.
More costly than other types of factoring.
Not as common as whole turnover or selective factoring.
How does invoice factoring work?
While the factoring process can vary depending on your business’s industry, it typically follows these steps:
Your business provides goods or services to businesses or government agencies.
Your business issues invoices to your clients.
You apply to sell your unpaid invoices to a factoring company.
The factoring company reviews your application and offers an advance of 80% to 90% of your invoices’ value up front.
Your clients repay their invoices to the factoring company.
You receive the remaining value of your invoices, with the fee subtracted.
In many cases, the factoring company handles the invoices after you sign up. However, some allow you to maintain that relationship with your client.
How much of an advance can I get?
Advance rates range from 80% to 95%, though you could see rates as low as 50% and as high as 100%. However, factoring companies have minimum and maximum invoice values, usually between $10,000 and $10 million — though these limits can get higher.
How long does it last?
Many factoring companies require you to sign up for a contract that lasts between six months and one year. In that case, you’d repeat this process several times. Others offer spot factoring, which allows you to renew your contract as needed each month.
How much does factoring cost?
The main cost of invoice factoring is the factor fee. This fee is typically a percentage of your invoices’ total value. How this works depends on the fee structure your factoring company uses.
Also known as variable factor fees, tiered factoring is when a company charges a fee based on the time it takes for your clients to fill their invoices. This fee is often between 0.5% and 4%.
Some lenders charge the same fee every few days, weeks or months. Others might impose a slightly higher fee for the first 30 days and a lower fee for every 10 or 15 days after.
You might also pay fees that increase every 10 or 15 days. For example, a company might charge 1% for the first 10 days, 2% for the second 10 days and up to 9% for the last 10 days.
Also called a flat rate, a fixed factor fee is a one-time fee a company charges regardless of how long clients take to satisfy their invoices. This type of fee is most common with trucking and transportation factoring companies and can be 2% or 3% of your total invoices.
While not as common, some companies calculate your fee based on interest. Prime plus uses the Wall Street Journal prime rate, adding a little extra for itself. If the prime rate is 5% and your factoring company charges a 2% fee on top, your prime plus fee would total 7%.
Because the prime rate is an APR, you’d actually pay around 0.02% in interest each day your client takes to pay back the invoice. Note that the prime rate is a benchmark rate that often changes based on the state of the lending market. Because of this, companies impose minimum and maximum interest rates they’ll charge, often around 5% and 15%.
Many factoring companies require a processing or administrative fee up front when you apply for your advance. Like the factor fee, it’s usually a percentage of your invoices’ value — often 3%. But unlike the factor fee, you pay it once.
What happens if my client doesn’t pay?
It depends on the factoring company. Most companies offer recourse factoring, where it’s your business’s responsibility to pay back the invoice should your client fail to pay up. Others offer nonrecourse factoring, where the factoring company absorbs the cost.
A few offer a combination of the two, where you’re responsible for paying some of the invoices if your clients don’t pay, and the factoring company covers the rest.
While nonrecourse factoring might sound less risky for your business, it’s also more expensive. If your clients have a history of late payments, you might want to consider another type of working capital financing.
How to qualify
Most invoice financing companies have relaxed requirements compared to other lenders. But generally, invoice factoring is only available to business-to-business (B2B) or business-to-government (B2G) companies. Consumer-facing companies should consider a merchant cash advance instead, which is often based on credit card sales.
Invoice financing companies often have minimum credit score, time in business and revenue requirements. But most accept poor credit. Some will work with businesses that have been around for as little as three months or have as little as $10,000 in monthly revenue. Cash flow generally doesn’t affect your ability to qualify.
These companies tend to focus on your invoice amount and the quality of your clients. For example, some might check your client’s personal credit history instead of yours since customer payments determine whether the advance is paid on time.
Who should consider invoice factoring?
Invoice financing makes sense for any B2B or B2G business. But it’s most commonly used by the following industries:
When looking for a factoring company that works best for your business, ask yourself the following questions:
Is my business eligible? While factoring companies are relatively lenient about who they’ll take on, you often must satisfy at least one or two requirements. Don’t waste your time with a company that ultimately won’t work with you.
Does it accept invoices from my clients? Many factoring companies work with business-to-business and business-to-government invoices, but your business might work with other types of clients.
How much can I get up front? Make sure your advance is enough to cover your business’s overhead costs.
How does the factor fee work? Tiered factoring and prime plus can save your business money if its invoices are due within 30 days. You might want to look for a fixed rate if you have longer due dates.
Are there any other fees? Look for administrative and processing fees in particular. Some companies charge extra fees for optional services like wire transfers.
How much will it cost? After you’ve narrowed down a few companies, crunch the numbers to estimate how much working with each company might cost.
Pros and cons of invoice factoring
Not sure if factoring is right for your business? Weigh the pros and cons of working with a factoring company.
Pros
Reduces cashflow gaps. Factoring allows you to take on more projects and bring in more money without waiting to get paid.
Low or no credit requirements. Most factoring companies don’t require a minimum credit score to work with business owners. Even if they do, most accept poor credit.
Open to newer businesses. If your factoring company is one of the few requiring a specific time in business, it’s usually less than a year.
No repayments. After you sell your invoices, the deal is done: Your business doesn’t have to take time for monthly repayments or keep track of a loan.
No collateral. You don’t have to put any of your business assets on the line to qualify for this advance. And it doesn’t require a personal guarantee.
Cons
Can be expensive. Factoring is among the costlier types of business financing and isn’t an ideal long-term solution.
It’s an advance, not a loan. While invoice factoring can be a good source of working capital, it’s not an ideal solution if you need funds to expand or take on larger projects.
You can lose touch with your clients. After you sell your invoices, the factoring company typically handles payment requests — not your business.
Your customer’s bad credit affects the cost. Many factoring companies look at your clients’ credit scores to determine your fees, not yours.
You might be responsible for late invoices. While nonrecourse factoring is less expensive, your company risks buying back invoices your clients are late to fill.
More ways to finance cash flow gaps
Invoice factoring isn’t the only way to cover your overhead expenses while waiting for your clients to pay for a project. You may want to consider these alternatives before you apply for invoice factoring.
Invoice financing
Traditional invoice financing is an advance on your business’s outstanding invoices. It works by giving your business up to 100% of your outstanding receivables upfront — this percentage is called an advance rate. And as customers fill their invoices, you repay the provider plus a monthly fee.
The main benefit of traditional invoice financing is getting a larger advance upfront and maintaining a relationship with your customers. But if your customers don’t pay on time, you’re still responsible for paying for the advance.
Accounts receivable line of credit
Some invoice finance and factoring companies offer a line of credit to businesses that continually need cash flow assistance. Here’s how it works: When you bill a customer an invoice, your business can withdraw that amount from the credit line. Each withdrawal turns into a short-term loan, which you repay plus interest or a monthly fee, depending on the finance company.
Bottom line
Invoice factoring is an easy way to borrow money when you need an immediate cashflow solution — especially if you have bad credit, your business is just starting out or you’ve had difficulties obtaining a loan in the past.
But this asset-based financing option can get expensive and comes with costs that are difficult to predict. Compare other options to make sure invoice financing is right for your business.
Anna Serio is a lead editor at Finder, specializing in consumer and business financing. A trusted lending expert and former certified commercial loan officer, Anna's written and edited more than 1,000 articles on Finder to help Americans strengthen their financial literacy. Her expertise and analysis on personal, student, business and car loans has been featured in publications like Business Insider, CNBC and Nasdaq, and has appeared on NBC and KADN. Anna holds an MA in Middle Eastern studies from the American University of Beirut and a BA in Creative Writing from Macaulay Honors College at Hunter College, CUNY.
Could anyone recommend a factoring company that has offered excellent service and a straight forward agreement? I had spoken to a few companies, and when I get the contracts, they seem to hide extra tricks to beef up their fees. I have a staffing agency. I would highly appreciate a recommendation from a user rather than a sales rep. Thanks, Ernesto.
Thanks for getting in touch with Finder. I hope all is well with you. 😃
As as a comparison website, I’m afraid I can’t provide specific recommendations. However, I would highly suggest that you check the factoring company we feature above. You can also compare business loan providers that offer factoring services by using our table. To directly get in touch with the providers above, please click the “Go to site” green button.
I hope this helps. Should you have further questions, please don’t hesitate to reach us out again.
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Could anyone recommend a factoring company that has offered excellent service and a straight forward agreement? I had spoken to a few companies, and when I get the contracts, they seem to hide extra tricks to beef up their fees. I have a staffing agency. I would highly appreciate a recommendation from a user rather than a sales rep. Thanks, Ernesto.
Hi Ernesto,
Thanks for getting in touch with Finder. I hope all is well with you. 😃
As as a comparison website, I’m afraid I can’t provide specific recommendations. However, I would highly suggest that you check the factoring company we feature above. You can also compare business loan providers that offer factoring services by using our table. To directly get in touch with the providers above, please click the “Go to site” green button.
I hope this helps. Should you have further questions, please don’t hesitate to reach us out again.
Have a wonderful day!
Cheers,
Joshua