Invoice factoring converts unpaid B2B invoices into cash now. You sell the receivable to a factor at a discount, receive most of the face value within a day or two, and the factor collects from your customer on the original terms. It is not a loan — no debt is created, and approval turns mainly on your customers' credit rather than your own.
That distinction is the whole product. A business with thin credit and $400,000 in receivables from creditworthy commercial customers is often a strong factoring candidate and a weak loan candidate at the same time. This page covers advance rates, real cost, recourse versus non-recourse, which industries fit, and when factoring is the wrong answer.
How factoring works, step by step
- You deliver the work and invoice the customer on your normal terms — net 30, net 60, net 90.
- You submit the invoice to the factor, who verifies the work was completed and the customer accepts the invoice.
- You receive the advance, typically within 24–48 hours of verification. Under standard practice this is generally 70–85% of the invoice's face value for eligible receivables, though strong commercial receivables in some industries advance higher.
- Your customer pays the factor on the original due date.
- The factor releases the reserve — the withheld portion — back to you, minus the factoring fee.
The reserve is the part people miss. You do not get 100% up front; you get the advance now and the balance when the customer pays. That structure is what protects the factor against disputes, short-pays, and returns.
What factoring costs
Factoring is priced as a discount fee on the invoice's face value, usually assessed per period the invoice remains outstanding — per 30 days is the common convention. Cost is driven by four things: the creditworthiness of your customers, how long invoices typically take to pay, your monthly volume, and whether the arrangement is recourse or non-recourse.
Because the fee accrues with time, your customers' payment behavior sets your real cost. The same fee schedule produces a very different effective rate on an invoice paid in 25 days than on one paid in 75. Before signing, ask for your own aging report and calculate the average days-to-pay across your top customers — that number, not the headline fee, tells you what factoring will actually cost you.
Dilution: the number underwriters actually watch
Dilution measures the gap between what you invoice and what actually gets collected — credit memos, disputes, short payments, returns, and allowances. It is the single metric that most determines your advance rate. Under standard asset-based lending practice, dilution above roughly 5% draws scrutiny and typically reduces the advance rate, because it signals that a meaningful share of invoiced dollars never converts to cash.
If your dilution is high, the fix is operational rather than financial: tighten your acceptance and delivery documentation so fewer invoices get contested. That work raises your advance rate more reliably than shopping factors does.
Recourse vs non-recourse
This is the most consequential term in the agreement and the most commonly misunderstood.
Recourse factoring
If your customer does not pay, you buy the invoice back or substitute another. You carry the credit risk. In exchange, the fee is lower. Most factoring arrangements are recourse.
Non-recourse factoring
The factor absorbs the loss if your customer fails to pay — but read the definition of failure carefully. Non-recourse almost always covers credit events specifically, meaning the customer's insolvency or bankruptcy. It typically does not cover a customer withholding payment over a dispute, a quality complaint, or a delivery disagreement. Those come back to you regardless of the label on the agreement.
Our page on recourse vs non-recourse factoring compares the two in detail.
The clause to read first. Before the rate, find the notification and verification terms. In most factoring, your customer is notified and remits payment directly to the factor. If your customer relationships would be damaged by that — or if your contracts restrict assignment of receivables — you need to know before you sign, not after. Non-notification arrangements exist but are reserved for larger, established businesses.
What makes an invoice eligible
Not every receivable can be factored. Eligible invoices generally must be:
- Business-to-business or business-to-government. Consumer receivables are not factorable.
- For work already delivered. A signed contract for future work is not a receivable; that is a job for purchase order financing.
- Free of prior liens. An existing UCC filing over your receivables must be released or subordinated first. See funding with a UCC lien.
- Undisputed and current. Invoices already well past due, or in dispute, are typically excluded.
- Owed by creditworthy customers. The factor underwrites your customer, and will usually cap concentration — a customer representing an outsized share of your receivables may be limited.
Which businesses factoring fits
Factoring solves one specific problem exceptionally well: you have done the work, the money is real, and it arrives 30 to 90 days after you need it. Industries where that gap is structural are the natural fit:
- Trucking and freight — the classic use case, where brokers pay on terms and fuel is due now. See trucking funding.
- Staffing agencies — payroll runs weekly while clients pay monthly, a mismatch factoring is built for. See staffing agency funding.
- Construction and subcontractors — long pay cycles and retainage. See working capital for contractors.
- Manufacturing and wholesale distribution — production costs are paid long before the invoice clears.
- Commercial cleaning, security, and business services — labor-heavy work billed monthly in arrears.
Businesses that sell to consumers, take payment at the point of sale, or invoice very small amounts are usually better served by a merchant cash advance or a line of credit.
Factoring vs financing vs an advance
Three products get compared here and they are genuinely different:
- Invoice factoring — you sell the receivable. The factor owns it, collects it, and your customer typically knows. No debt on your balance sheet.
- Invoice financing — you borrow against receivables and keep collecting yourself. Your customer relationship is untouched, and you carry the debt. See invoice financing vs factoring.
- Merchant cash advance — a purchase of future revenue, repaid from daily or weekly sales. No receivables required, faster, and priced accordingly. See MCA vs invoice factoring.
When factoring is the wrong answer
Factoring will not help if the underlying problem is margin rather than timing. Selling receivables at a discount every month compresses already-thin margins permanently — it fixes cash flow while quietly making profitability worse. If your invoices are collected reasonably promptly and the shortfall is really about pricing or cost structure, address that first; improving your profit margin is the cheaper fix.
It is also the wrong tool if your customers pay quickly, if your receivables are consumer rather than commercial, or if you need capital for something no invoice backs — equipment, a buildout, or an acquisition. In those cases look at equipment financing, a term loan, or an SBA loan.
If you are not sure which fits, compare every funding option or apply once and we will match your file to the funders whose guidelines you meet.
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Sources: OCC Comptroller’s Handbook: Asset-Based Lending (advance rates on eligible accounts receivable generally 70–85%; dilution above approximately 5% treated as a supervisory concern affecting advance rates; eligibility and concentration standards).
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