That gap is common. Atradius's 2026 U.S. survey found late payments affect an average 22% of B2B receivables.
Factoring is one way to close that gap. A business sells eligible unpaid invoices to a factoring company, called a factor, for less than face value in exchange for faster cash. This guide covers the process, types, fees, risks, benefits, and how factoring compares with invoice financing and credit lines.
Key Takeaways
- Factoring turns eligible receivables into quicker cash, minus fees or discounts.
- Factors mostly weigh your customers' credit and payment history.
- Recourse, reserves, notification, and contract length change the deal materially.
- Compare total net proceeds, not the headline fee.
What Is Factoring in Finance?
Factoring, also called invoice factoring or accounts receivable factoring, is the sale of receivables at a discount for immediate funding. According to the International Factoring Association, the factor takes ownership of the invoice and the payment process. That separates it from simply waiting for customers to pay.
The three parties
- Business (client): delivers the goods or services and issues the invoice.
- Factor: buys or funds against the receivable and charges a fee.
- Customer (account debtor): ultimately pays the invoice.
Why profitable businesses still run short on cash
Your books can show revenue and receivables while your bank balance is thin. A contractor waits on project payments. A staffing firm funds weekly payroll before clients pay. In one provider-reported Georgia staffing case, the firm needed $200,000 for weekly payroll while waiting 45 days for payment.
Four numbers to keep straight
- Face value: the full invoice amount.
- Advance: the percentage paid upfront, commonly 80% to 90% in provider-published ranges.
- Reserve: the portion held back until the customer pays. It isn't the fee.
- Rebate: the reserve returned to you after fees.
Sale or loan?
Factoring is usually described as an invoice sale, not a conventional loan. Accounting treatment is less tidy. Under ASC 860, a transfer of receivables with recourse can still be a sale if control conditions are met. Otherwise it is treated as a secured borrowing.
The answer depends on the full contract, so ask your accountant.
How Does Factoring Work?
Step 1: The business issues an invoice
You deliver the goods or services, send an invoice with payment terms, and identify which receivables might qualify.
Step 2: The factor reviews invoices and customers
The factor checks that the invoice is valid and looks at customer creditworthiness. It also weighs:
- Payment history
- Disputes
- Concentration risk
- Industry
- Invoice age
- Your proof of delivery
Criteria differ by provider. Not every invoice or customer will qualify.
Step 3: You agree on terms and receive the advance
The agreement sets:
- Advance amount and reserve
- Fee structure and extra charges
- Recourse status
- Notification rules
- Contract length and minimum volume
The advance is not the invoice's full value. The reserve is settled after your customer pays.
Step 4: The customer pays the factor
In standard (disclosed) factoring, customers get a notice of assignment and pay the factor directly. Under UCC 9-406, once that notice is effective, paying you instead generally doesn't discharge the customer's debt.
In confidential arrangements, the customer isn't told, and the factor may act as an extension of your business. These aren't available everywhere.
Collections matter. A factor's tone with your customers reflects on you.
Step 5: The factor settles the balance
The customer pays, the factor deducts its fees and other charges, and the remaining reserve goes to you.
Hypothetical example
This uses figures from Porter Capital's illustration. It is not a Steady Capital Solutions transaction.
| Item | Amount |
|---|---|
| Invoice face value | $50,000 |
| Advance at 85% | $42,500 |
| Reserve held | $7,500 |
| Factoring fee at 3% | $1,500 |
| Reserve returned after customer pays | $6,000 |
| Total received | $48,500 |
Porter doesn't state the payment time, so don't annualize this example. A 3% fee over 30 days is a very different cost from the same rate over 90 days.
Types, Costs, and Risks of Factoring
Recourse and non-recourse
With recourse, you stay responsible if your customer doesn't pay. You may have to repay the advance or replace the invoice. With non-recourse, the factor absorbs specified credit losses under the agreement.
"Non-recourse" isn't blanket protection. IFA describes bankruptcy coverage with timing conditions, not protection against ordinary lateness. altLINE notes it doesn't necessarily cover disputed products or services.
A 2020 non-recourse agreement filed with the SEC required the seller to warrant actual delivery and no offsets or counterclaims. Dispute resolution stayed with the seller.
Disclosed, confidential, spot, and ongoing
- Disclosed: customers know and pay the factor.
- Confidential: customers aren't notified, where permitted.
- Spot: one invoice or a few, usually with less commitment.
- Ongoing: a facility covering many invoices, often with minimums and longer terms.
Understanding factoring fees
Provider benchmarks vary. Porter cites typically 1% to 4% per 30 days, while altLINE says generally 1% to 5% of invoice value. These are provider-published ranges, not market averages.
Fee structures differ:
- Flat: one percentage regardless of payment time.
- Tiered: altLINE's example is 1.5% for the first 30 days, then 0.50% per additional 10 days.
- Daily: accumulates with days outstanding.
Extra charges can include:
- Wire fees (altLINE quotes $15 to $30 per transfer)
- Origination ($150 to $500)
- Verification, lockbox, minimum-volume, and termination fees
A 2023 Bay View Funding amendment shows how fees can stack: a 90% advance, a 0.45% fee for the first 30 days, and a separate finance fee of prime + 1.75% with a 9.25% floor. Those were negotiated historical terms, not typical rates.
A monthly percentage of face value also isn't an APR. Regulations such as California's commercial financing disclosure rules compute APR from the timing of cash received and paid.
What affects the price?
- Customer credit quality and payment speed
- Invoice age and volume
- Concentration among a few customers
- Industry and dispute history
- Recourse status and contract structure
Don't compare providers on the headline fee alone. Calculate expected net proceeds and read every ancillary charge.
Risks and contract issues
- Higher cost than some traditional financing
- Recourse obligations
- Customer relationship strain
- Reserves held longer than expected
- Personal guarantees, UCC liens, and filings
- Year-long contracts and minimum volumes, per Triumph
Distinguish a limited validity guarantee (triggered by fraud or false representations) from a broad personal guarantee.
Contract checklist:
- Advance rate
- Reserve release timing
- Eligible invoices
- Dispute handling
- Customer notification and collections
- Renewal and cancellation
- Default provisions
- Lien release on termination
Benefits and Suitability: When Can Factoring Help?
Benefits for cash flow
Faster cash can cover payroll, supplies, inventory, payables, marketing, equipment, or growth without waiting out the invoice cycle. It fits industries with real B2B invoices and slow payment:
- Construction, where labor and materials come before payment
- Staffing, where payroll is weekly
- Transportation, where freight factoring is common
- Commercial services and technology
- Some healthcare and professional-service firms
Why some businesses choose it
Factoring can help when invoices are sound but liquidity is thin. Common triggers include:
- Uneven payment timing
- Fast growth
- Seasonal demand
- Hard-to-get bank credit
According to one provider, a Texas packaging distributor used a recourse facility after customer concentration blocked bank financing.
It won't fix unprofitable pricing, weak collections, disputed invoices, or customers unlikely to pay.
Who may not be a good fit
- Businesses selling mainly to consumers, since invoices to private individuals may not qualify
- Businesses relying on card sales, which suit revenue-based advances rather than factoring
- Companies with frequently disputed invoices
Steady sales don't automatically mean factoring-eligible receivables.
Factoring Compared With Other Funding Options
Factoring vs. invoice financing
Factoring generally means selling or assigning receivables, and the factor may take over collections. Invoice financing or discounting usually means borrowing against receivables as collateral. You stay responsible for repayment and collections.
Terminology overlaps among U.S. providers. Compare ownership of receivables, repayment duties, fees, and unpaid-invoice treatment, not the product name.
Factoring vs. a line of credit or loan
| Option | Structure | Flexibility |
|---|---|---|
| Factoring | Invoices sold | Tied to receivables |
| Invoice financing | Borrowing against invoices | Tied to receivables |
| Line of credit or loan | Borrowing, repaid over time | Broader spending |
Credit lines and loans usually involve different underwriting, collateral, and reporting. The right fit depends on:
- How urgent the need is
- Your receivables' quality and volume
- Borrowing capacity and cost tolerance
- Whether you want to outsource collections
How to compare providers and next steps
- Get written terms covering advance rates, fees, and reserves.
- Calculate total cost, not just the advertised rate.
- Confirm how unpaid or disputed invoices are handled.
- Ask how and when customers will be contacted.
- Review exit terms, notice periods, and any minimums.
- Consult an accountant or attorney when the structure is complex.
If you're weighing factoring against working-capital or revolving-credit options, Steady Capital Solutions connects businesses with independent third-party providers for working capital, business lines of credit, and other financing, with no application fees. Pricing, terms, and availability vary by applicant, provider, and state.
Frequently Asked Questions
What is a typical factoring fee?
Fees vary with invoice quality, customer credit, payment timing, industry, volume, and recourse. One provider cites 1% to 4% per 30 days. Compare the complete cost.
How does a factoring company work?
It reviews eligible invoices, advances part of their value, and collects from your customer. It then deducts fees and remits the remaining balance.
Who pays for factoring?
The business pays, through the fee deducted from invoice proceeds. The customer pays the invoice itself to the factor when directed.
Is factoring the same as invoice financing?
No. Factoring sells or assigns receivables, often with collections outsourced. Invoice financing borrows against them while you keep repayment responsibility.
Why would a company use a factoring company?
For faster working capital when customers pay slowly. It helps cover payroll and suppliers, fund growth, or fill gaps when traditional financing isn't readily available.
Is factoring a good idea?
It can be, for businesses with valid, collectible B2B invoices. It is a poor fit when fees, recourse exposure, customer notification, or contract restrictions outweigh the cash-flow benefit.
