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Invoice factoring guide

Improve your cash flow despite slow-paying invoices.

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.

Three types of invoice factoring to compare

Sell all of your invoices to a factoring company over a period of time.

Sell only the invoices you choose over a period of time.

Sell individual invoices in a one-off deal.

Whole turnover

This is a popular choice for companies that are expanding and 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 they want to factor and which they'd like to handle themselves. It allows companies to account for a number of 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 gives you the option to choose which invoices you finance and when. These features make this brand of factoring a sound option for small businesses that deal with a diverse array of 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:

  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 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.

Let’s take a look at an example …

Say your small business had $100,000 in unpaid invoices from a project with the Department of Transportation (DOT), due within 60 days. You got another contract with the DOT but needed the funds from the first project to get started.

Here’s how your advance and costs might break down if you signed up for invoice factoring:

Advance rate


How much you get up front


Factor fee rate

0.5% per week over 60 days

Factor fee cost


Other fees

Advance fee of 1%

Total cost


How much you get back


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 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.

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.

Compare invoice factoring & financing providers

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Name Product Filter Values Min. Amount Max. Amount APR Requirements
Lendio business loans

Finder Rating: 4.75 / 5: ★★★★★
Lendio business loans
Starting at 6%
Operate business in US or Canada, have a business bank account, 600 personal credit score
Submit one simple application to potentially get offers from a network of over 300 legit business lenders.
Big Think Capital

Finder Rating: 4.7 / 5: ★★★★★
Big Think Capital
Starting from 6%
600+ credit score, 2 years in business, $100,000 annual revenue
Nav business loans

Finder Rating: 4.8 / 5: ★★★★★
Nav business loans
As low as 1%
550+ credit score
Get connected with personalized matches from over 100 lending options. Plus, get the best rates with the help of dedicated funding managers.
Fora Financial business loans

Finder Rating: 4.1 / 5: ★★★★★
Fora Financial business loans
12+ months in business, $15,000+ gross monthly sales, no open bankruptcies
Get qualified for funding in minutes for up to $750,000 without affecting your credit score. Best for companies with at least six figures in annual revenue.
ROK Financial business loans

Finder Rating: 4.7 / 5: ★★★★★
ROK Financial business loans
Starting at 6%
Eligibility criteria 1+ year in business, $15,000+ in monthly gross sales or $180,000+ in annual sales
Apply for up to $5 million with a 15-second online application. Choose your best offer and get funded as soon as the same day.

Finder Rating: 4.3 / 5: ★★★★★
550 minimum credit score, 12+ months in business, Operate in any US state (including DC) except NV, NH, MD, WV, IA, be registered as an LLC, LLP, S-Corp, or C-Corp
Upstart features a quick, online application and accepts all credit scores. Its unique underwriting process considers alternative factors, such as education and work history.

Compare up to 4 providers

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.


  • Reduces cashflow gaps. Factoring allows you to take on more projects and bring in more money without having to wait 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.


  • 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 having to buy back invoices your clients are late to fill.

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.

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 isn't 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.

Is invoice factoring the same as invoice financing?

No. Invoice financing uses your business’s unpaid invoices as collateral for a loan, while invoice factoring involves selling your invoices to another company. With invoice financing, you repay the loan plus interest over time.

Invoice payment flexibility

More flexibility. You get to pick and choose which invoices to finance and when.

Less flexibility. Invoice amounts are typically advanced in the order received.


Monthly rate (usually between 3 and 5% that depends on the amount of your invoices.

High fees (as much as 15% of invoice amount) for selling a single invoice, lower fees for long-term commitments.

Retrieving payment

Your business usually deals directly with the customer for repayments.

The factoring company will usually have a debt collection service retrieve payments on your behalf.


Private. Customers typically won't know you are using a financing company.

Less privacy. Customers will be aware you are using a factoring company when contacted about payment from the third-party.

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.

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