Improve your cash flow despite slow-paying invoices.
Factoring is one way to keep your company’s cash flowing, relying on your accounts receivable to qualify for an advance of what you’re owed. This short-term financing may be especially helpful if you’re not able to qualify for traditional business loans.
Our top pick: National Business Capital
Multiple types of financing options available.
- Minimum Funding Amount: $10,000
- No industry restrictions
- Simple and fast online application process
- Must have been in business for at least 3 months
- Must have monthly revenue of $10,000 or more
- Startup financing available with 680+ personal credit score
What is a factoring company?
A factoring company specializes in buying business invoices at a discount. It engages in financial services often referred to as invoice factoring or accounts receivables factoring.
Invoice factoring is designed to help businesses with regular cash flow gaps cover overhead costs while waiting for their clients to satisfy their invoices.
Because factoring companies buy a business’s invoices up front, they aren’t technically lenders. You don’t repay the factoring company for the money you receive. Instead, factoring companies charge a fee that’s typically equal to a percentage of your total invoices, which means you won’t ever receive the full value of your invoices with this service.
How do factoring companies work?
Factoring companies work by purchasing a business’s invoices in exchange for an advance on the total value of your invoice. Advance rates range from 80% to 95%, though you could see rates as low as 50% and as high as 100%.
After your business receives its advance, you’re free to spend the money as needed. Because the factoring company owns the invoices, it’s responsible for connecting payments on the invoices. Often a factoring company will contact your business clients directly, though some allow you to handle payments on your invoices.
Once the invoices are paid off, the factoring company pays you the remaining percentage of the invoices’ value, minus a factor fee. Factor fees vary by company, a few also requiring a processing fee for the service.
Compare business loan providers that offer factoring services
Is my business eligible?
Most factoring companies have flexible eligibility requirements. Unlike business lenders, factoring companies usually aren’t concerned about your revenue or owner’s credit scores.
Instead, factoring companies more often consider:
- The value of your invoices. Some factoring companies impose minimums and maximums for your invoices’ value.
- When the invoices are due. Most factoring companies work with invoices due in 30 to 90 days.
- The type of clients. Factoring companies deal with invoices from other businesses or the government. If you’re looking for an advance on future consumer sales, consider a merchant cash advance instead.
Top two factoring companies to consider
Thinking of factoring your business’s invoices? Get started by comparing these top two factoring companies.
Best for a comparison: National Business Capital
National Business Capital isn’t a factoring company itself. Instead, it’s a connection service that can help your business find multiple types of financing — including accounts receivable financing. Its partners have flexible eligibility requirements and work with business owners of all credit types.
Like BlueVine, its partner factoring companies offer access to a line of credit that your business can use to factor invoices as the need arises. However, the minimum invoice value is higher than many factoring companies. Factor fees vary depending on the company you work with.
- Advance rate: Varies by company
- Credit limit: $10,000 to $5 million
- Invoice requirements: Between $40,000 and $10 million in monthly invoices
- Eligibility requirements: At least six months in business
- Fees: Vary by company
Read our National Business Capital review
Best for keeping your customer relationships: BlueVine
BlueVine is an online business lender and factoring company that offers invoice factoring with a twist: You can stay in touch with your customers after you’ve sold your invoices. It also lets your business choose which invoices to sell, and it doesn’t require a monthly minimum.
The downside is that BlueVine imposes stricter eligibility criteria than other factoring companies. It also doesn’t offer government contract factoring and focuses on recourse factoring only.
After your business signs up with BlueVine, you get access to a line of credit to factor invoices as needed.
- Advance rate: 85% to 90%
- Credit limit: $20,000 to $2.5 million
- Invoice requirements: Must be worth $500 from other businesses and due in 1 to 13 weeks
- Eligibility requirements: At least three months in business, $100,000 annual revenue and a credit score of 530 or higher
- Factor fee: 0.2% to 1.3% each week your clients take to satisfy the invoices
- Other fees: $15 wire transfer fee (optional)
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.
Tiered factor fees
Also known as a variable factor fee, tiered factoring is when a company charges a fee based on the amount of 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.
Fixed factor fees
Also called a flat rate, a fixed factor fee is a one-time fee that the company charges regardless of how much time 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.
Prime plus
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, and companies impose minimum and maximum interest rates they’ll charge, often around 5% and 15%.
Other fees
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.
Invoice factoring cost example
| Value of invoices | $100,000 |
| Advance rate | 90% |
| How much you get upfront | $90,000 |
| Factor fee rate | 0.5% per week over 60 days |
| Factor fee cost | $4,286 |
| Other fees | Advance fee of 1% |
| Total cost | $5,286 |
| How much you get back | $4,714 |
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 off a loan. Others offer nonrecourse factoring, where the factoring company absorbs the cost.
A few offer a combination of the two, making you responsible for paying some of the invoices if your customers don’t pay and leaving factoring company responsible for the rest.
While nonrecourse factoring might sound like it’s 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 can I find the right factoring company for my business?
When looking for a factoring company that works best for your business, ask:
- 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 of 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 a specialized client.
- 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. If you have longer due dates, you might want to look for a fixed rate.
- 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 for a rough estimate of how much working with each company might cost.
Advantages and disadvantages of factoring companies
Not sure if factoring is right for your business? Weigh the pros and cons of working with a factoring company.
Advantages
- 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 bad or poor credit.
- Open to new 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.
Disadvantages
- 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.
Are factoring companies regulated?
Not as much as other financing options. Factoring companies are largely unregulated in the US, which means fewer laws limiting how much a company can charge or how it discloses its fees.
Generally, trade organizations oversee the industry, including the International Factoring Association, the Commercial Finance Association and the Independent Factoring Standards Association. These organizations set standards for best practices among factoring companies, though they aren’t legally able to enforce them.
How factoring works by industry
5 invoice factoring mistakes to avoid
- Skipping the fine print. Carefully read your contract for details on the factor fee and other fees that come with your advance to avoid surprises down the road.
- Confusing purchase orders and invoices. A purchase order is not the same as an invoice. For an advance on purchase orders, look into purchase order financing instead.
- Not making time for paperwork. Selling your invoices takes more time than you might expect, thanks to the mountain of paperwork. Ask your factoring company about documents it wants to see so that you can plan before you sign a contract.
- Only relying on invoice factoring. Factoring can take your business only so far. You might find a better option if your business doesn’t rely as much on accounts receivables.
- Confusing invoice factoring with financing. Invoice financing is like a loan backed by your business’s invoices, which you repay plus interest and fees. Financing is generally more flexible in terms of the value of your business’s invoices and can get you up to 100% up front.
Bottom line
They’re not lenders, but factoring services can be helpful for businesses looking to cover overhead costs — especially if you have trouble qualifying for business loans. But the process takes time and money, given the fees involved.
To learn more about financing in general, read our guide to business loans. Or read our breakdown of the different types of invoice factoring.
Frequently asked questions
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