Invoice Factoring: How It Works, What It Costs (2026)
Invoice factoring sells your unpaid invoices at a discount so you get cash now instead of in 30 to 90 days. The mechanics are simple. The pricing is where operators get hurt.
Factoring is the oldest form of business finance still in wide use, and the most consistently mis-sold. The advertised rate is almost never the number you end up paying, because the rate is one of five variables that decide the total. This guide covers the mechanics, the real cost structure, who the product genuinely suits, and how to compare offers without being led by the headline.
How invoice factoring works
You deliver goods or services and issue an invoice. Instead of waiting 30 to 90 days for payment, you sell that invoice to a factoring company. They advance you most of the face value immediately, collect from your customer, then release the remainder minus their fee.
- You invoice your customer as normal. Nothing changes on their side except where they send payment.
- You submit the invoice to the factor, usually with proof of delivery — a signed BOL, an approved timesheet, a completed work order.
- The factor advances you a percentage, typically same day or next business day once you are set up.
- Your customer pays the factor directly. This is the notice of assignment, and it is not optional in most agreements.
- The factor releases the reserve — the held-back remainder, minus the discount fee and any add-ons.
What it actually costs
Five variables. Comparing factors on the first alone is how businesses end up paying roughly double what they expected.
- The discount rate. The headline. Often quoted per 30 days, sometimes per 15, which doubles it.
- The advance rate. How much you get up front. The rest sits in reserve as unavailable working capital.
- Recourse or non-recourse. Who absorbs the loss if the customer never pays. Non-recourse costs more and covers less than most people assume.
- Add-on fees. ACH and wire, application, monthly minimums, credit checks, lockbox, same-day surcharges.
- The contract. Term, minimums, termination notice, and the buyout cost if you leave early.
The complete fee anatomy, with worked examples →
How to read the blanks on this site
Every populated figure on this site was read from the company's own published pages, with the source and date attached. Where a cell says Not published, the company does not put that term in writing on its site — and in a market where the contract matters more than the headline rate, what a factor declines to publish is often the more useful signal. We never fill a gap with an estimate.
Who factoring actually suits
Factoring is priced off your customers' credit rather than yours. That is the single most important thing to understand about it, because it explains everything else: why new businesses qualify, why it is available after a bank declines you, and why customer concentration matters so much in underwriting.
It fits when
- You invoice other businesses on terms — B2B, not consumer
- Your margins comfortably absorb a fee of a few percent
- The cash gap between doing the work and being paid is what limits your growth
- Your customers are creditworthy even if you are not yet
It fits badly when
- You sell to consumers — consumer receivables are generally not factorable
- Your margins are already thin, and a few percent is the difference between profit and loss
- The underlying problem is pricing, not timing. Factoring converts a timing gap into a fee; it cannot fix an unprofitable business, and using it to do so is expensive
- You bill for future work or deposits rather than delivered work
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The main varieties
| Type | How it differs | Best when |
|---|---|---|
| Whole-ledger | You commit all invoices for a term | Steady volume, and you want the cheapest per-invoice price |
| Spot / single invoice | You pick which invoices to sell | Irregular volume, or one chronically slow customer |
| Freight factoring | Built for carriers; bundles fuel cards and broker credit checks | Trucking, of any size |
| AR factoring | The same product under the term larger finance teams use | Established companies with a finance function |
| Invoice financing | A loan secured against invoices; you keep collections | You want confidentiality and have the admin capacity |
The thing people are least prepared for
In most factoring agreements your customers are notified to pay the factor instead of you. That is the notice of assignment, and for many business owners it is the genuinely uncomfortable part — it tells your customers you are using a finance facility, and it puts a third party's collections team in contact with your accounts.
Two practical consequences. First, ask any prospective factor how their collections team communicates, how quickly they escalate, and whether you can flag sensitive accounts. That team is now part of your customer experience. Second, if notification is genuinely unacceptable for your business, you are looking at invoice financing instead, which is usually confidential — but requires stronger credit on your side and leaves collections with you.
The UCC filing, and why it matters later
Your factor will file a UCC-1 financing statement against your receivables. This is normal and not sinister — it establishes their claim on the assets they are buying. But it has two consequences worth knowing before you sign.
While it is in place, no other lender can take first position on those same receivables. If you later want an asset-based line of credit, or a second facility, that filing is in the way. And when you leave, the factor has to file a UCC-3 termination before a new provider can take first position — which means a slow release blocks your next facility. Ask about release timing before you sign, not when you are trying to leave.
Where to go next
- Invoice factoring companies compared — the full index with sourced terms
- Fees and true cost — all five variables with worked examples
- Cost calculator — model a real month, not one invoice
- Small business factoring — low-volume and no-minimum options
- Factoring vs a business loan — which fits which problem
- The Rate Index — published terms across every company we track