Invoice Factoring

How invoice factoring works

The business delivers its product or service and issues an invoice with standard payment terms. Instead of waiting weeks or months to be paid, it sells that invoice to a factor, which advances a percentage of the face value within a day or two. When the customer eventually pays the invoice, the factor releases the held-back reserve to the business and keeps a factoring fee (often a small percentage per 30 days outstanding). Because approval rests mainly on the creditworthiness of the customers who owe the invoices — not the business itself — factoring is accessible to young or thinly-capitalized companies that could not qualify for a bank loan.

Factoring vs. a business loan

Factoring is not a loan and adds no debt to the balance sheet — it is the sale of an asset (the receivable). A loan is repaid by the borrower on a schedule with interest; a factored invoice is repaid by the borrower's customer when they settle the invoice. Approval hinges on the customers' credit rather than the borrower's, and funding is fast because there is collateral built in. The trade-off is cost: the effective rate of factoring is usually higher than bank financing, and in recourse factoring the business must buy back invoices the customer never pays.

Recourse vs. non-recourse factoring

Factoring agreements come in two flavors. In recourse factoring — the most common and cheapest — the business must buy back any invoice the customer ultimately does not pay, so it keeps the credit risk. In non-recourse factoring the factor absorbs the loss if the customer fails to pay because of insolvency, which costs more because the factor is pricing that risk in. Non-recourse is not blanket protection: it usually covers only specific events like a customer bankruptcy, not disputes over the work. A broker should read the definition of a covered default closely before calling a facility truly non-recourse.

What invoice factoring costs: advance rates and fees

Two numbers define a factoring deal: the advance rate and the fee. The advance rate — typically 70% to 90% of the invoice — is how much cash the business gets up front, with the remainder (the reserve) released minus the fee once the customer pays. The factoring fee usually runs about 1% to 5% per 30 days the invoice stays outstanding. For example, on a $50,000 invoice at an 85% advance and a 3% monthly fee, the business receives $42,500 immediately; if the customer pays in 30 days the factor keeps $1,500 and releases the remaining $6,000 reserve. Because fees accrue with time, factoring is cheapest when customers pay quickly.

Spot factoring vs. whole-ledger factoring

Some businesses factor every invoice (whole-ledger or contract factoring), which usually earns a lower rate in exchange for committing volume. Others use spot factoring, selling a single large invoice when one customer's slow payment creates a cash gap — flexible, but priced higher per invoice because the factor cannot count on steady volume. The right choice depends on how predictable the crunch is: ongoing payroll-driven gaps favor a whole-ledger facility, while a one-off large project favors spot factoring.

Industries that rely on invoice factoring

Factoring is most common in industries that do the work first and bill other businesses on long terms. Staffing and security-guard firms factor to make weekly payroll while clients pay net-30 or net-60. Freight carriers and owner-operators factor loads to keep trucks fueled between settlements. Manufacturers, wholesalers, and trade contractors — roofing, glazing, flooring — use it to bridge the gap between finishing a job and collecting on it. The common thread is creditworthy business customers and a structural delay between delivering value and getting paid.

Brokers who work invoice factoring deals use JYNI to find borrowers and run the whole pipeline in one place — see AI lead generation software for B2B or browse how teams use JYNI by profession.

Is invoice factoring a loan?

No. Factoring is the sale of your unpaid invoices to a factor, not borrowed money, so it adds no debt to your balance sheet. The factor is repaid when your customer pays the invoice, not by you on a fixed schedule.

What does invoice factoring cost?

Factors typically advance 70-90% of the invoice upfront and charge a fee of roughly 1-5% per 30 days the invoice stays unpaid. The effective annualized cost is higher than a bank loan, which is the price of speed and not needing strong business credit.

What is a factoring company?

A factoring company (a factor) is the third party that buys a business's unpaid invoices at a discount, advances most of the value up front, and collects payment from the customer directly. It makes its money on the factoring fee charged for the time the invoice stays outstanding.

What is the difference between recourse and non-recourse factoring?

With recourse factoring the business buys back any invoice its customer never pays, so it keeps the credit risk and pays a lower fee. With non-recourse factoring the factor absorbs that loss for covered events such as customer insolvency, which costs more.

Can a startup use invoice factoring?

Yes. Because factoring approval depends mainly on the creditworthiness of the customers who owe the invoices rather than the age or credit of the business itself, young companies that cannot qualify for a bank loan can often still factor.