Business Loans
How Does LendingTree Get Paid?
LendingTree is compensated by companies on this site and this compensation may impact how and where offers appear on this site (such as the order). LendingTree does not include all lenders, savings products, or loan options available in the marketplace.

How Does LendingTree Get Paid?

LendingTree is compensated by companies on this site and this compensation may impact how and where offers appear on this site (such as the order). LendingTree does not include all lenders, savings products, or loan options available in the marketplace.

Invoice Factoring: How Does It Work?

Editorial Note: The content of this article is based on the author's opinions and recommendations alone. It may not have been reviewed, commissioned or otherwise endorsed by any of our network partners.

Invoice factoring, which involves the sale of invoices to a factoring company, allows companies to unlock cash tied up in unpaid invoices. To keep bills paid and payroll funded, a business-to-business (B2B) company could turn to invoice factoring, even if the company has a limited or poor credit history. However, invoice financing can be more costly than other forms of business financing.

What is invoice factoring?

How does the process of invoice factoring work?
Invoice factoring companies
Invoice factoring pros and cons
Tips for applying for invoice factoring

What is invoice factoring?

Invoice factoring is a financing arrangement where a business owner sells invoices to a factoring company in exchange for a cash advance. A factoring company is a type of commercial financing company that provides services such as purchasing invoices, paying cash advances on the invoices and performing collections duties. Factoring companies may also be involved in other forms of commercial asset-based lending, such as accounts receivable financing.

Generally, factoring advances are 70% to 90% of the value of your unpaid invoices. The factoring company would collect a fee when the invoice is paid, then send you the remaining amount. You could sell just one batch of invoices to a factoring company, or you could enter into a longer term or ongoing relationship. Invoice factoring carries the potential to become expensive. The factoring fee, sometimes referred to as the discount rate, is a flat or variable fee that may be a one-time upfront payment or an ongoing rate that may go up the longer the invoice goes unpaid.

Since invoice factoring involves selling your invoices to an outside company, your clients will often know that their invoices are the subject of a factoring arrangement (through a process called notification). When your customers learn that you are using a factoring arrangement with another company, it could damage your relationship and reputation. Your customers may dislike dealing with an outside company during the payment process. Small business owners should carefully consider the notification and collections practices of a factoring company before they commit to the arrangement.

Recourse vs. nonrecourse factoring

When considering an invoice factoring arrangement, one of the most important conditions to consider is whether the arrangement is a recourse or nonrecourse arrangement.

  • Recourse factoring arrangements allow the factoring company to seek repayment of its advance if your client fails to pay its invoice. You would be responsible to pay the invoice.
  • Nonrecourse factoring puts the factor on the hook for the invoice rather than the business owner.

Most nonrecourse agreements are only nonrecourse if your customer cannot pay due to bankruptcy or other financial reasons. If your customer believes that you did not fulfill your contract or withholds payments due to a dispute, the factor company may still seek repayment of the advance.

Invoice factoring vs. invoice financing

Invoice factoring is commonly confused with invoice financing. Although these two models of financing share similarities, they are not the same thing.

Invoice financing is a loan (normally a revolving line of credit) that a lender issues based on your company’s average invoice volume. In invoice financing, the invoices serve as collateral for the loan. Companies using invoice financing may choose to draw on their line of credit when they need cash, but they do not have to draw on the line when their cash position is strong enough to meet their current obligations.

To qualify for invoice financing, you generally need a strong business credit history and healthy invoices. By comparison, invoice factoring is more readily available to companies with limited credit history or some form of financial trouble.

Invoice factoring example

The owner of ABC Manufacturing — let’s call him Bill — needs funds to purchase supplies. Bil decides to sell outstanding invoices to an invoice factoring company. The invoices are due in 30 days. Bill agrees to a recourse invoice factoring agreement to receive $10,000 with a factoring fee of 1% per month. He will get 80% upfront, then receive the remaining amount once the invoices are paid.

This means Bill would receive $8,000 as an advance, pay $100 (1% of $10,000) as the factoring fee, and receive the remaining $1,900 once his customers pay the invoices.

How does the process of invoice factoring work?

The invoice factoring process is different than most forms of business financing: it involves selling your assets (invoice receivables) rather than borrowing based on collateral or a promise to pay. Here’s what you can expect.

1. Determine the details of your invoice factoring agreement.

Before approaching an invoice factoring company, set your expectations for the arrangement. You may have the option to sell select invoices to the factor (“spot factoring”). Consider which of your clients are most creditworthy and most likely to repay invoices on time.

You can also decide whether or not you want your clients to know about the arrangement. If you don’t want them to know, look for a factoring company that offers nonnotification invoice factoring. That way, customers won’t be alerted when you sell their invoices.

Once you find a factoring company that meets your criteria, you can apply for financing. Upon approval, you’d find out additional details from the factor, such as your advance rate and factor fee. You’d also need to clarify what happens if a customer doesn’t pay an invoice. Depending on whether your factor offers recourse or nonrecourse factoring, you may have to pay the bill.

2. Continue fulfilling contracts for customers.

Your daily operations are unlikely to change after an invoice factoring arrangement is in place. Your company would continue to accept and fulfill contracts from most of your usual clients. Factoring companies generally don’t interfere with the daily operations of your company.

However, if you have a longer-term factoring agreement, your factor company may screen new customers to be sure the new customer is creditworthy. You will be able to sell invoices from creditworthy customers to the factor company once you complete the contract and send the invoice.

3. Send and sell invoices.

As soon as an invoice is sent to your customers, it’s eligible to sell to the factoring company. You may have determined ahead of time whether the factor would purchase all of your invoices, or just certain ones. Based on your agreement, you may be able to sell additional invoices to the factor.

4. Receive your advance.

The advance would likely range from 70% to 90% of the value of each individual invoice that you sold. The factoring company would deposit the advance funds into your company’s bank account. Many factoring companies issue the advance within one business day of purchasing the invoice.

5. Factoring company collects its fee when the customer pays.

When your customer pays their invoice, the payment would go directly to the factoring company. The factor would then calculate and collect its fee before sending you the remaining amount.

You could expect the factor to collect one of two types of fees:

  • Flat fee: A one-time fee charged upfront. The fee amount stays the same no matter how long the invoice remains unpaid.
  • Variable fee: A fee that increases once an invoice has been outstanding for a certain amount of time. For instance, a factor may charge 2.5% for the first 30 days, then add 0.5% to the fee for every 14 days the bill remains unpaid.

Flat rates may be higher than variable rates, since the factor will collect the same amount no matter when the bill is due. Variable fees may be more affordable, as they are based on the risk of the invoice. If you have clients who consistently pay early, you wouldn’t have to worry about a fee increase.

Invoice factoring companies

As you begin your search for business financing, here are a few online invoice factoring companies you could consider to get started.

Paragon Financial Group

Paragon Financial Group pricing and fees:

  • Factoring from 80% to 90% of the invoice value. Same-day funding available.
  • Fees from 0.90% to 2.50% for the first 30 days that an invoice is outstanding. The fee increases depending on how many days the invoice has been unpaid.

Businesses eligibility:

  • At least $50,000 in monthly revenue
  • A personal credit score of at least 550
  • Paragon does not require a minimum amount of time in business.

When you apply, Paragon would require you to submit the follow information about your business and invoices:

  • Three months’ worth of bank statements
  • Most recent accounts payable or accounts receivable reports
  • Sample invoice
  • Articles of incorporation or your business’s dba filing


altLINE, a division of Southern Bank Company, pricing and fees:

  • Recourse factoring for B2Bs up to 90% of the value of the invoice.
  • Rates start at 0.50%.

altLINE doesn’t disclose specific borrower requirements online but when reviewing your application, you can expect altLINE to look at:

  • Amount you’d like to borrow
  • Creditworthiness of your customers
  • Value and age of your receivables
  • Whether you wish to factor a select few or all of your invoices

Universal Funding Corporation

Universal Funding Corporation pricing and fees:

  • Factoring up to 95% of unpaid invoices, or between $25,000 and $5,000,000 on a monthly basis.
  • Rates from 0.55% to 2.00% for the first 30 days.

Additionally, Universal Funding lists various fees online that you may owe, such as a $35 credit approval fee and a $30 outgoing wire fee. Universal Funding requires applicants to submit their most recent accounts receivable and accounts payable aging reports, a sample invoice and their articles of incorporation or dba filing, if applicable.

Invoice factoring pros and cons

When deciding whether an invoice factoring arrangement makes sense for your business, here are a few potential benefits and drawbacks to consider.


  • Improve cash flow: Your company can receive an advance of 70% to 90% of the invoice value, right away. This means you don’t have to wait until your clients pay you to pay your bills.
  • Guaranteed payment: Nonrecourse factoring arrangements guarantee that your company will get at least partially paid in the event that the client can’t pay for financial reasons. In a nonrecourse agreement, the factoring company will allow you to keep the advance, even if the client defaults on its payments.
  • No collateral: Invoice factoring means you sell your company’s invoices. You don’t need additional collateral like equipment, land or cash to receive your cash advance.
  • May get financing with bad credit: Your company’s ability to qualify for invoice factoring usually depends on the quality of the invoices rather than on your company’s proven ability to repay. That means that companies with limited or poor credit history may still qualify for factoring.


  • Potential damage to your reputation: Selling invoices to a factoring company may put a conflict barrier between you and your customers, especially if a customer needs to resolve an issue.
  • Higher cost: It can be tough to compare factoring fees to other forms of financing that use traditional forms of interest, such as APR.
  • Business-to-business invoices only: Most factoring companies only allow you to sell invoices that your company has issued to a business. Business-to-customer style businesses may not qualify for invoice factoring.
  • Best terms reserved for ongoing contracts: In general, spot factoring (where companies sell just a few invoices to a factor) has higher fees than an ongoing factoring relationship. But the ongoing factoring relationship means that your company will pay more in factoring fees over time.

Tips for applying for invoice factoring

The most critical information you need to apply for invoice factoring is up-to-date information on your accounts receivable. An accounts receivable aging report will contain most of the information you need to apply. If you’ve never created an accounts receivable aging report, you may wish to connect with a local Small Business Development Center to get free help creating one.

In addition to making sure your financial information is organized, here are some other steps you can take to ease the process of applying for invoice factoring.

Decide whether you want a longer-term contract

To get your best rates on factor financing, you have to sign a contract that includes a minimum quantity or amount of invoices. A larger contract may bring down the factoring fee, but it can lead to higher total costs, as you would be paying for factoring over a longer period of time. Spot factoring (where you sell just a few invoices to a factor) means a higher one-time fee, but doesn’t require a long-term commitment.

Calculate the total monthly cost

You’ll want to decide if the fees are worth it to you. The easiest way to do this is to calculate a total monthly cost and the cost per dollar advanced. You’ll need to know your average factor fee and your advance rate. You’ll simply divide your average factor fee by the advance rate to calculate the cost of borrowing a dollar.

Clarify the company’s recourse policy

If one of your customers defaults on its invoice, what will happen to you? Some factor companies allow you to keep the advance, but will not pay out the balance. In other cases, you’ll have to pay back the advance if your customer defaults. Most factor companies specialize in either recourse or nonrecourse factoring.

Get quotes from several factor companies

If factoring fits your company’s needs, you’ll want to compare multiple factor companies. Each company will give you a unique advance rate and cost structure. They may also have different terms regarding whether they seek repayment from you if a client doesn’t pay.

After you get a quote, be sure to ask a representative a few questions. Be sure the quote includes every fee you’ll ever be charged. You may have to pay “set-up” fees in addition to the ongoing fees.


Compare Business Loan Offers