What Is Invoice Factoring? A Plain Explanation
The short version: you sell an unpaid invoice at a discount to get paid now instead of in 30 to 90 days.
Invoice factoring is the sale of your accounts receivable to a third party at a discount. You receive most of the money immediately. The buyer — the factor — collects from your customer and keeps a fee for the service and the risk. That is the whole product. Everything else is structure and pricing.
A worked example
You invoice a customer $10,000 on net-45 terms. You do not want to wait 45 days.
- You sell the invoice to a factor at a 3% discount rate with a 90% advance.
- They advance you $9,000 within a day.
- Your customer pays the factor $10,000 on day 45.
- The factor releases the $1,000 reserve minus the $300 fee, so you receive $700.
- You received $9,700 of a $10,000 invoice, 45 days early. The cost was $300.
Whether $300 is expensive depends entirely on what 45 days of cash lets you do. For a carrier who can run another load with it, it is cheap. For a business with nothing to deploy it against, it is 3% of revenue given away for convenience.
What it is not
- Not a loan. No debt is created. You sold an asset, so nothing appears as borrowing on your balance sheet.
- Not based on your credit. It is based on your customers'. This is why new businesses qualify and why a bank decline does not disqualify you.
- Not invoice financing. That is a loan secured against invoices where you keep collecting. The difference matters →
- Not confidential by default. Your customer is normally instructed to pay the factor instead of you.
- Not a fix for thin margins. Factoring converts a timing gap into a fee. If the work is unprofitable before the fee, it is more unprofitable after.
What it costs, honestly
Discount rates commonly sit in low single digits per 30 days, but the quoted rate is only part of the cost. Advance rate, recourse terms, monthly minimums and transfer fees all move the real number, and a low headline rate with a monthly minimum can easily cost more than a higher rate without one.
The full fee anatomy, with worked examples → · Model your own month →
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.
What you need to qualify
- B2B invoices for delivered work. Consumer receivables are generally not factorable, and neither are deposits or future work.
- Creditworthy customers. This is the actual underwriting question.
- A clean UCC position on your receivables — no existing lender holding first position.
- Basic entity documentation and a business bank account.
- Proof of delivery per invoice — a signed BOL, approved timesheet or completed work order.
Notably absent from that list: your credit score, your trading history, and your profitability. That is the entire reason factoring exists as a separate product from lending.
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The constraint nobody warns you about
Customer concentration. Factors apply concentration limits — a cap on how much of the facility any single customer can represent, often somewhere between 20% and 50%. If one client is 80% of your revenue, most of your ledger may be ineligible regardless of how good that client's credit is.
This catches early-stage companies constantly, because early-stage companies almost always have concentrated revenue. Ask about concentration limits before the application, not after.
Who uses it
Any business that invoices other businesses on terms and needs the cash sooner. In practice the heaviest users are trucking, staffing, construction subcontracting, manufacturing, wholesale distribution and government contracting — industries where long client payment terms sit against short payroll, fuel or materials cycles.
The pattern is always the same: a fixed short-cycle cost you cannot delay, against a long-cycle receivable you cannot accelerate. Factoring buys the gap.