What Is Invoice Factoring?
Sell your unpaid invoices to a factoring company for immediate cash, usually 80%–90% advanced upfront, with the balance (minus a 1%–5% fee) paid when your customer pays the invoice. Best for B2B businesses with slow-paying creditworthy customers.
Invoice factoring is a financing arrangement where a business sells its unpaid B2B invoices to a third party (the "factor") at a discount in exchange for immediate cash — typically 80%–90% of the invoice face value advanced now, with the remainder (minus the factor's fee) released when the customer pays.
Key takeaways
- Factoring is based on your customers' credit, not yours, useful for newer businesses.
- Advance rate is typically 80%–90% of invoice face value, paid within 24–48 hours.
- Factor fees are usually 1%–5% of invoice value, charged over 30–90 days.
- Recourse factoring: you eat the loss if the customer doesn't pay. Non-recourse: the factor does (more expensive).
- Works best for B2B businesses with creditworthy customers on net-30 to net-90 terms.
Who this is for
B2B businesses (staffing, trucking, manufacturing, wholesale, professional services) waiting 30–90 days to get paid.
Newer or weaker-credit businesses whose customers have strong credit, qualification is based on the customer, not the seller.
What you need to qualify
| Requirement | Typical standard |
|---|---|
| Business model | B2B with invoiced sales (not B2C) |
| Customer credit | Creditworthy commercial customers |
| Invoice terms | Net-30 to net-90 |
| Minimum monthly volume | $10,000+ in invoices (varies) |
| Owner credit | Often flexible, customer credit matters more |
How invoice factoring actually works step-by-step
Invoice factoring converts unpaid B2B invoices into immediate cash by selling them to a factoring company (the 'factor') at a discount. After a one-time setup (1–2 weeks), each new invoice can be factored within 24–48 hours of issuance. The factor advances 80–90% of the invoice face value immediately and holds the remainder in reserve until the customer pays.
When the customer pays the invoice (usually directly to the factor in 'notification' factoring), the factor releases the reserve to the borrower minus the factor fee. Typical factor fees run 1–5% of invoice value over 30–90 days; per NerdWallet's 2026 factoring data, a 2.5% fee on net-45 paying customers works out to roughly 3.75% effective cost per invoice cycle.
Why factoring qualifies businesses that can't get loans
Factoring underwrites the customer, not the borrower. Because the factor is buying the receivable and collecting from the customer, the customer's credit is the primary risk factor. This makes factoring uniquely accessible to newer businesses, sub-580 FICO owners, and businesses with prior denials, as long as their B2B customers have strong commercial credit.
Industries that lean heavily on factoring, staffing, trucking, manufacturing, wholesale, government contracting — share the same profile: weeks-to-months gap between delivering work and getting paid, creditworthy commercial buyers, and gross margins that can absorb a 1–5% factoring fee.
Recourse vs. non-recourse factoring, and the cost difference
Recourse factoring puts the borrower on the hook if the customer doesn't pay, the borrower reimburses the advance. Non-recourse factoring shifts the credit risk to the factor. Non-recourse pricing typically runs 100–200 bps higher than recourse and is often limited to specific approved customers.
Most well-run factoring relationships use recourse on creditworthy long-term customers and reserve non-recourse for new or unrated customers.
Worked example: $250K in net-60 invoices factored monthly
Staffing agency invoices $250,000 per month to Fortune 500 clients on net-60 terms. Factor advances 88% of face value ($220,000) on day 1 and holds 12% in reserve. Factor fee is 2.5% per 30 days, so on 60-day customer payment terms the total fee is roughly 5% of $250,000 = $12,500. When the customer pays the factor in 60 days, the factor releases the $30,000 reserve minus the $12,500 fee, remitting $17,500 to the borrower.
Borrower's effective economics: receives $220,000 day 1, receives an additional $17,500 on day ~60, pays a total of $12,500 in fees on $250,000 of invoiced revenue (5%). For a staffing business with 22%–28% gross margin, the 5% factoring fee preserves 17%–23% gross margin and unlocks the cash flow needed to make next Friday's payroll. Without factoring, the agency would need 60 days of payroll reserve sitting idle, roughly $200K–$400K of locked working capital for a $250K/mo invoice volume.
Scaled annually: $3M of invoiced revenue at the same 5% effective rate = $150K in total factoring fees, replacing what would otherwise require roughly $400K of permanent working capital to operate without factoring. The implicit return on that freed working capital often exceeds the factoring cost by 2x–4x for businesses with profitable growth opportunities to deploy the freed cash against.
What makes a customer factorable, and what disqualifies them
Factors underwrite the customer, not the borrower, so the customer's creditworthiness drives both approval and pricing. Factorable customers typically share four traits: documented commercial credit history (D&B PAYDEX or similar), public-record financial stability (publicly traded, government, or large private companies with credit-rated debt), payment-history visibility (the factor can verify the customer pays its other suppliers on time), and a non-disputed pattern of acceptance (the customer doesn't routinely contest invoices or demand contra-account reductions).
Common disqualifiers: customer is a personal-name LLC with no commercial credit footprint, customer is a sister company of the borrower (related-party transactions are universally declined), customer is in a payment-dispute history with the borrower, customer is in bankruptcy or has open judgments, or customer is in a country the factor doesn't service (cross-border factoring is a specialty product). Industries with high acceptance: government contracting, healthcare to insurance payers, staffing to Fortune 1000, manufacturing to retail chains. Industries with high decline: construction (lien waiver complications), services with disputed deliverables, and any B2C invoices.
Practical sequencing: before signing a factoring agreement, submit your top 10 customer names to the factor for pre-approval. Customers that get pre-approved at the 'A' tier price at the factor's best published rates; 'B' tier customers price 0.5–1.5 points higher; 'C' tier customers may be excluded entirely. This pre-screen prevents the surprise of signing an agreement and then discovering half the invoice volume isn't actually factorable.
What this typically costs
Illustrative invoice factoring cost. Sources: NerdWallet 2025, IFA factoring industry data.
| Invoice value | $100,000 |
| Advance rate | 85% ($85,000 paid in 24–48 hrs) |
| Factor fee | 2.5% per 30 days |
| Customer pays in 45 days | Total fee: ~3.75% ($3,750) |
| Reserve released (net of fee) | $11,250 |
| Total received | $96,250 of $100,000 invoice |
How to decide if this is right for you
Five gates before adopting invoice factoring.
-
1
Confirm your customers are creditworthy commercial buyers
Strong customers (large corporates, government) = low cost. Weak customers = expensive or declined.
-
2
Verify your gross margin can absorb 3–5% per invoice cycle
Thin-margin businesses (under 20% gross margin) often can't make the math work.
-
3
Decide recourse vs. non-recourse per customer
Recourse for known long-term customers; non-recourse for new or unrated customers.
-
4
Confirm notification vs. non-notification fit
Most factoring is notification (customer pays factor directly). Non-notification is rarer and more expensive.
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5
Compare against a LOC for owners with strong credit
If the owner has 680+ FICO and 2+ years in business, a LOC is usually cheaper and more private than factoring.
When this makes sense
- Your cash-flow gap is structurally caused by slow-paying customers.
- Your customers are large and creditworthy.
- You'd rather pay 1%–5% per invoice than 1.30 factor on an MCA.
When to be careful
- Your customers may resent a third party collecting their invoices (notification factoring).
- Concentration risk: if 70% of invoices come from one customer, factor pricing rises.
- If your customers don't pay, recourse factoring puts you on the hook.
How this plays out in practice
Staffing agency funding weekly payroll
Situation: Staffing firm with net-45 invoices to Fortune 500 clients; needs to cover weekly payroll.
Recommendation: Factoring is ideal. Creditworthy customers + long cycles + payroll urgency = perfect fit. Use recourse factoring at 2–3% per 30 days.
Trucking owner-operator with slow-pay broker
Situation: Owner-operator with net-30 to net-60 broker invoices; needs cash on delivery.
Recommendation: Freight factoring. Fund the invoice the day it's submitted; broker pays factor in 30–60 days.
Service firm with strong owner credit
Situation: Consulting firm, owner has 720 FICO, 4 years in business, net-30 invoices.
Recommendation: Bank LOC, not factoring. Owner credit qualifies for cheaper revolving credit.
See if your invoices qualify for factoring
Free quote across BizBee factoring partners — soft pull only.
Frequently asked
Common questions
Glossary
Terms worth knowing
- Advance rate
- The percentage of an invoice's face value paid to the borrower upfront — typically 80–90%. The remainder is held in reserve until the customer pays.
- Recourse
- A factoring structure where the borrower reimburses the factor if the customer doesn't pay. Cheaper than non-recourse but shifts credit risk back to borrower.
- Notification factoring
- A factoring structure where the factor invoices the customer directly and collects payment. The most common structure.
- Concentration risk
- The factor's exposure to a single customer that represents a large share of factored invoices. Heavy concentration usually raises factor pricing.
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