Invoice factoring converts outstanding receivables into immediate cash. You sell your unpaid invoices to a factoring company at a discount: typically receiving 80-90% of the invoice value upfront. When your customer pays the invoice (on their net-30 or net-60 terms), the factoring company remits the remaining balance minus their fee.
Unlike a loan, factoring is not debt: it is an advance against money already owed to you. Your credit score matters far less than the creditworthiness of your customers, because the factoring company’s risk is on your customer’s ability to pay, not yours. This makes factoring accessible to businesses that could not qualify for traditional bank financing.
The most important structural distinction in factoring is recourse. With recourse factoring, you are responsible for buying back invoices your customer does not pay: the factoring company’s risk on non-payment flows back to you. With non-recourse factoring, the factor assumes the credit risk on customer non-payment and you keep the advance even if the invoice goes uncollected.
Non-recourse factoring costs more (typically 0.5-1% higher fees) and only protects against customer insolvency, not disputes or slow payment. Most small businesses use recourse factoring because their customers are creditworthy: the problem is timing, not creditworthiness.
| Option | Advance rate | Effective cost | Speed | Credit requirement | Best when |
|---|---|---|---|---|---|
| Invoice factoring | 80–90% of invoice | 12–36% APR | 24–48 hours | Your customers’ credit | Consistent slow-paying B2B customers |
| Invoice financing (ABL) | 80–85% of AR | 15–25% APR | 1–3 days | Your credit + AR quality | Larger businesses with $500K+ AR |
| Business line of credit | Up to approved limit | 10–30% APR | Days–weeks | Your credit (680+) | Recurring cash gaps, established businesses |
| Early payment discounts | Full invoice (less 2%) | 2% of invoice | Immediate | None | Good customer relationships, simple to implement |
| Merchant cash advance | N/A (future sales) | 50–200% APR | Same day | Revenue history | Last resort: avoid if any other option exists |
Factoring makes sense for staffing agencies, trucking companies, government contractors, and B2B service businesses with reliable enterprise customers who pay net-30 to net-90. The customers are creditworthy, the cash gap is structural, and the factoring cost can be built into pricing or absorbed within the margin. These are the businesses where factoring is a routine working capital tool, not an emergency measure.
Factoring does not make sense for consumer-facing businesses (retail, restaurants) because you cannot factor individual small transactions cost-effectively. It is also a poor fit for businesses where customers dispute invoices frequently: factoring contracts typically require you to buy back disputed invoices regardless of recourse terms, and dispute cycles destroy the cash timing advantage factoring provides.
Looking at all your short-term financing options together?
