You did the work. You sent the invoice. Your customer says "net 60." Your rent, payroll, and suppliers don't say net 60 back. Invoice factoring exists to close exactly that gap — and it's one of the most misunderstood tools in business funding. Here's the whole thing, stripped down to what actually matters.
The napkin version
You sell an unpaid invoice to a factoring company. They hand you most of the money today — typically 80-95% of the invoice's face value. When your customer eventually pays (on their normal 30-90 day schedule), the factoring company takes their fee out and sends you the rest. You traded a slice of the invoice for getting paid now instead of in two months.
Walking through an actual invoice
Say you invoice a customer $20,000, due in 45 days. You factor it the same day you send it:
| Step | What happens | Cash to you |
|---|---|---|
| Day 1 | Factoring company advances 90% of the invoice | $18,000 |
| Day 1–45 | Your customer pays the factoring company directly (or you, depending on setup) | — |
| Day 45 | Customer pays in full; factoring fee (say 3%, $600) is deducted from the remaining 10% | $1,400 |
| Total | You received $19,400 of a $20,000 invoice, 44 days early | $19,400 |
The $600 is the entire cost. No interest accrues, no monthly payments, nothing to pay back if the deal is non-recourse and the customer simply doesn't pay (more on that below).
Recourse vs. non-recourse — the distinction that actually matters
Recourse factoring: if your customer never pays, you buy the invoice back or repay the advance. You're carrying the credit risk; it's cheaper because of it.
Non-recourse factoring: the factoring company eats the loss (for most legitimate non-payment reasons, like the customer going bankrupt) in exchange for a higher fee. You're paying for insurance you may never need.
Most factoring in practice is recourse — non-recourse is usually reserved for larger, more established relationships. Ask which one you're signing before you compare pricing between two offers; a cheaper recourse deal isn't actually cheaper than a pricier non-recourse one if your customer's credit is shaky.
Why factoring approves companies banks won't touch
Traditional lenders underwrite you — your credit, your time in business, your financials. Factoring companies primarily underwrite your customer — the business that owes the invoice. That's why a six-month-old company with a single invoice owed by a large, creditworthy customer can often factor that invoice, even when the same company would get declined for a term loan.
What the fee actually depends on
- Your customer's creditworthiness. An invoice owed by an established, reliably-paying company factors cheaper than one owed by a shaky small business.
- How long the invoice takes to get paid. Fees are often structured to increase the longer an invoice sits open — a 30-day payer costs less to factor than a 90-day payer.
- Invoice and portfolio size. Larger, more consistent invoice volume typically earns better rates than one-off invoices.
- Industry. Trucking, staffing, and construction have deep factoring markets with competitive rates; niche industries may see fewer options and higher pricing.
When factoring is the wrong tool
Factoring is a recurring cash-flow tool, not a one-time fix. If you're factoring invoice after invoice just to stay afloat month over month with no plan to stop, that's usually a sign of a deeper margin or overhead problem factoring can't solve — it's buying time, not fixing the leak. It's also the wrong choice if your customers pay fast already (net 15 or faster) and you have reserves to cover the gap; the fee buys speed you don't need.
Common questions
How does invoice factoring work, in simple terms?
You sell an unpaid invoice for most of its value up front (80-95%), the factoring company collects from your customer, and you get the rest minus a fee once they pay. You're trading a slice of the invoice for getting paid now instead of in 30-90 days.
How much does invoice factoring cost?
Typically 1-5% of the invoice value, depending on your customer's credit, invoice size, and how long it takes to get paid. It climbs the longer an invoice sits unpaid.
What's the difference between recourse and non-recourse factoring?
In recourse factoring, you repay the advance if your customer never pays — you carry the risk, and it's cheaper. In non-recourse, the factoring company absorbs that loss for a higher fee.
Can a brand-new business qualify?
Often yes. Approval is based mainly on your customer's creditworthiness rather than your business history, so factoring works for new companies whose customers are established, creditworthy businesses.