Invoice factoring guide

Invoice factoring can be useful if you’re struggling with cash flow because you rely on revenue from other businesses. Most small businesses can qualify, since factoring companies typically consider your client’s credit rather than your own. But it’s one of the most expensive types of business financing out there. And it could compromise your relationship with your customers.

What is invoice factoring?

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 that have 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.

How does invoice factoring work?

While the factoring process can vary depending on your business’s industry, it typically follows these steps:

1. Your business provides goods or services to businesses or government agencies.
2. Your business issues invoices to your clients.
3. You apply to sell your unpaid invoices to a factoring company.
4. The factoring company reviews your application and offers an advance of 80% to 90% of your invoices’ value up front.
5. Your clients repay their invoices to the factoring company.
6. 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 a 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.

• Tiered factor fees

  Also known as variable factor fees, 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 a 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. 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.

Is my business eligible?

Most factoring companies have flexible eligibility requirements. Unlike business lenders, factoring companies usually aren’t concerned about your revenue or personal credit score.

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.

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Name	Product	Filter Values	Loan amount	APR	Requirements
Kickpay e-commerce loans			$20,000 – $1,000,000	Not applicable	At least $250,000 in the past 12 months of revenue, e-commerce business, use a 3rd party fulfillment center for storing and shipping inventory, at least one US location.	Get a loan for your e-commerce business based on your sales history.	Check eligibility More Info		loading Fetching your data...
FundThrough Express Invoice Financing			$500 – $50,000		Considers your business’s invoicing and banking history	Get an advance of up to $50,000 in just one day with this fully automated platform.	Check eligibility More Info		loading Fetching your data...
Fundbox			$1,000 – $100,000	4.99	You must have an established business.	Get flat rate, short-term financing based on the financial health of your business, not your credit score.	Check eligibility More Info		loading Fetching your data...
Lendio business loan marketplace			$500 – $5,000,000	Starting at 6%	Operate business in US or Canada, have a business bank account, 560+ personal credit score	Submit one simple application to potentially get offers from a network of over 75 legit business lenders.	Check eligibility More Info		loading Fetching your data...
Become business loan marketplace			$5,000 – $500,000	Starting from 7.5%	At least 3 months in business with $10,000 in monthly revenue or at least 6 months in business with $3,000 in monthly revenue.	Compare loan offers from top lenders using this marketplace. It’s free & won’t affect your credit.	Check eligibility More Info		loading Fetching your data...
Interstate Capital Factoring			100% of your unpaid invoices	Varies	Business in good standing with no existing tax liens	Free up working capital with an advance on up to 100% of your unpaid invoices.	More Info		loading Fetching your data...
BlueVine Invoice Factoring			$5,000 – $5,000,000	0.2% to 1.3%	530+ personal credit score, 3+ months in business, $100,000+ annual revenue	Invoice factoring with the flexibility to fund only the invoices you choose.	More Info		loading Fetching your data...

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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.

5 invoice factoring mistakes to avoid

Considering factoring your invoices? Watch out for these common mistakes small businesses make:

• 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 relies less 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

Invoice factoring might be useful if your B2B or B2G business has cashflow problems due to unpaid invoices. Especially if you’re in an industry that struggles to qualify for traditional business loans.

But it’s not cheap. And you might have to sign a contract that lasts anywhere from six months to a year. You can learn how it compares to other options by checking out our guide to business loans.

Frequently asked questions

• What's the difference between invoice discounting and factoring?

  Generally, there is none. Many companies use the terms invoice factoring and invoice discounting to refer to the same type of financing.

• Do I have to factor all of my company's invoices?

  It depends on the company, but often you can choose which invoices to factor. However, you likely need to have invoices that meet the company’s minimum value requirements.

• Can startups apply for invoice factoring?

  Sometimes. Factoring companies are generally more willing to work with newer businesses than lenders — as long as you have enough unpaid invoices. Check with the company’s eligibility requirements to make sure your business qualifies.