What Is Invoice Factoring and How Does It Work

Invoice factoring is a financial arrangement where a business sells its outstanding invoices to a third party—called a factoring company or "factor"—at a small discount in exchange for immediate cash. Unlike a bank loan, factoring is not debt. You're simply unlocking the money you've already earned but haven't yet collected.

Why Businesses Use Invoice Factoring

Most B2B transactions involve a delay between delivering goods or services and receiving payment. Your customers expect net-30, net-60, or even net-90 payment terms. Meanwhile, your business has immediate obligations: payroll, supplier invoices, rent, and equipment costs don't wait.

This gap—between earning revenue and collecting it—is where businesses run into cash flow problems. Invoice factoring eliminates that gap.

How the Process Works

Step 1: You deliver goods or services. You complete your work and send an invoice to your business customer as usual. Nothing changes about your relationship with that customer.

Step 2: You sell the invoice. You submit the invoice to a factoring company, along with basic documentation confirming the work was completed. The factor verifies the invoice is legitimate and your customer is creditworthy.

Step 3: You receive an advance. Within 24 to 48 hours, the factoring company advances you 80–90% (sometimes up to 95%) of the invoice value via bank transfer. You now have working capital without waiting for your customer to pay.

Step 4: Your customer pays the factor. When your customer's payment is due, they pay the factoring company directly. The factor then remits the remaining balance to you—minus a small factoring fee, typically between 1% and 5% of the invoice value.

What Does Factoring Cost?

Factoring fees—often called "discount rates"—typically range from 1% to 5% of the invoice value per month. The exact rate depends on your industry, your invoice volume, your customers' creditworthiness, and the length of payment terms.

Who Qualifies for Factoring?

Unlike bank loans, factoring approval depends primarily on the creditworthiness of your customers—not your own credit score or how long you've been in business. This makes factoring accessible to startups, companies with imperfect credit, businesses experiencing rapid growth, and seasonal businesses with irregular revenue.

Factoring vs. a Bank Loan

A business line of credit requires extensive documentation, good credit, established operating history, and often collateral. The approval process can take weeks to months. Factoring is different—approval happens in 24 to 72 hours, the amount you can access grows automatically with your revenue, and you're not adding debt to your balance sheet.