Which type of invoice factoring is right for your business?

Invoice factoring lets your your business unlock money your clients owe by selling their invoices to a third party for a fee. It can be a great source of working capital, especially if your business is in an industry that has a hard time getting a loan. But there are several different types of factoring to choose from — and not all are right for every business.

First, what exactly is invoice factoring?

Invoice factoring is a type of business financing in which a business sells their unpaid invoices to a factoring company at a discount. The company typically gives businesses between 80% and 95% upfront and then the rest of the funds after your clients pay up — with a fee subtracted.

Businesses can use their funds for any legitimate purpose like working capital. It can be expensive, so you might want to consider less costly financing like equipment loans if they're available to your business.

Three types of invoice factoring to compare

Compare business loan providers that offer invoice factoring

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Name	Product	Filter Values	Loan amount	APR	Requirements
Lendio business loans Finder Rating: 4.75 / 5: ★★★★★			$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 300 legit business lenders.	Go to site More Info	Compare	loading Fetching your data…
Biz2Credit business loans Finder Rating: 4.7 / 5: ★★★★★			$25,000 – $6,000,000	Starting at 6.50%	6+ months in business; $100,000+ annual revenue; 500+ credit score	Get only the capital you need through secure, prescreened lenders with this highly rated company offering SBA, expansion, working capital and other loans.	Go to site More Info	Compare	loading Fetching your data…
ROK Financial business loans Finder Rating: 4.7 / 5: ★★★★★			$10,000 – $5,000,000	Starting at 6%	Eligibility criteria 3+ months in business, $15,000+ in monthly gross sales or $180,000+ in annual sales	A connection service for all types of businesses — even startups.	Go to site More Info	Compare	loading Fetching your data…
Fundbox lines of credit Finder Rating: 4.2 / 5: ★★★★★			$1,000 – $150,000	Not stated	6 + months in business, $100,000+ in annual revenue, 600+ credit score	Get flat rate, short-term financing based on the financial health of your business, not your credit score.	Go to site More Info	Compare	loading Fetching your data…

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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.

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 makes this brand of factoring a sound option for small businesses who deal with a diverse array of clients and customers. But it can be more expensive.

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.

Bottom line

The type of invoice factoring that's right for you on the size of your company, your relationship with customers and how heavily your business relies on invoices for cash flow. Invoice factoring can offer efficiency and value that other business lenders don’t.

But that comes at a price. By choosing the best factoring company for your business, you can improve your cash flow and keep your customers happy.

Frequently asked questions

What happens if my clients don't pay on time?

It depends on whether you have recourse or nonrecourse factoring. With recourse factoring, it's your business's responsibility to cover the cost. With nonrecourse factoring, it's the factoring company's responsibility.

Typically recourse factoring is less expensive than nonrecourse factoring, since it's less risky for the lender.

How do I use invoice factoring if my business has inconsistent cash flow?

Factoring companies don't typically look at your business's cash flow when you apply as a business. If your business consistently struggles to cover overhead costs because of its cash flow, you might want to consider whole turnover factoring — you'll likely get a better rate than with any of the other options and have more consistent access to capital.