What is Invoice Factoring? How Does It Work?

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Invoice factoring allows small business owners to sell their invoices that are due in the future at a discount for cash upfront. Invoice factoring is different from invoice financing (also known as account receivables financing). Invoice financing is typically defined as the use of account receivables (e.g., invoices) as collateral for a loan or line of credit. Invoice factoring involves the selling of invoices whereas invoice financing involves the borrowing of money with invoices as collateral. Invoice factoring is a great option for small business owners who may not qualify for traditional loans or who would prefer not to take out loans. Invoice factoring is very common in the transportation, manufacturing and construction industries, but by no means is limited to those industries.

How Does Invoice Factoring Work?

Small business owners can contract with a factoring company, known as a factor, to have their invoices sold at discount in exchange for a cash advance. The factor will charge a discount fee (also known as a discount rate) that is usually assessed on a weekly or monthly basis. Generally, the cash advance is split into two parts: the advance and the reserve amount. The advance rate is generally 70% to almost 100% of the invoice and is paid upfront. The reserve amount is paid after the business’s customer fulfills the invoice.

There are also two types of invoice factoring: recourse and non-recourse factoring. Recourse factoring is a type of invoice factoring that provides less risk to the factor. If the customer fails to fulfill the invoice, the factor has the right to collect payment from the business owner. Non-recourse factoring, on the other hand, absolves the business owner of responsibility for the invoice. If the customer fails to fulfill the invoice, the factor is left on the hook. Because of the increased risk, many factors do not offer non-recourse factoring, or if they do, they offer it with tougher terms and rates.

Let’s say Jane owns a clothing manufacturing business and is hoping to steadily increase inventory throughout the year. In order to afford these costs, Jane decides to work with an invoice factoring company with her outstanding invoices that are due in 30 days. She agrees to a recourse invoice factoring contract of $10,000 with a discount fee of 1% per month. She will receive 80% up front and the remaining reserve once the invoices are fulfilled successfully.

In this example, Jane would receive $8,000 as the advance, pay $100 (1% of $10,000) as the discount fee, and would eventually receive the remaining $1,900 as the reserve once the invoice is paid by Jane’s customer.

Invoice Factoring Terms and Features

Terms and features of invoice factoring contracts vary between business owners, industries, and factoring companies, but here is a glance at the average terms and features.

Invoice Due Date15 - 90 days
AmountUp to $2 million
Advance Rate80% - 100%
Reserve Rate0% - 20%
Discount Fee1% - 5% weekly or monthly
Funding Time1 - 5 days

How to Qualify for Invoice Factoring

Qualifying for invoice factoring is quite simple. While some factoring companies require that businesses have fair to good credit and at least one year in business as a corporate entity (i.e., corporation, LLC, etc.), most factoring companies are flexible with these requirements. The most important criteria for factoring companies are who is paying the invoices and when they are due. Invoices generally must be with businesses (B2B) or government (B2G) customers (as opposed to consumers) with good credit history. Invoices also must be due within a reasonable amount of time (usually 30-90 days). In addition, the invoices must be free of any liens or encumbrances. That means a business owner can’t use the same invoices as collateral for a different loan unless a subordination agreement is in effect.

Invoice Factoring Companies

Here are some invoice factoring companies with quick and easy online applications.


Praised by many as the top choice for invoice factoring, BlueVine offers free accounts that can be opened in under five minutes. Invoice factoring amounts can extend up to $500,000 for invoices due in up to 90 days. Advance rates are typically 85-90% and funding can occur within 24 hours.


Another popular choice, Fundbox’s product operates more similarly to a line of credit than a traditional invoice factoring option. Fundbox offers a free account that syncs with various accounting software. When business owners need cash, they just go their account and clear an unpaid invoice and the full amount automatically transfers to their bank account. Business owners repay principal and advance fees in 12 equal weekly payments (early repayment is accepted as there are no prepayment penalties).

Alliance One

Alliance One offers invoice factoring services to both newly-formed and well-established businesses. Invoices can be due in up to 90 days and there are no monthly minimum factoring amounts. Funding usually occurs 24 hours after their verification process.


The Southern Bank Company’s altLINE offers invoice factoring services to businesses with a free application, same-day funding and competitive rates. Southern Bank’s altLINE evaluates the credit history of customers and works with businesses that have a limited operating history.

Bay View Funding

Bay View Funding has offered invoice factoring services to businesses since 1985. Their qualification process only requires basic company information and can be completed in as little as 3 days, once the application is accepted. Funding typically occurs within 24 hours after receiving invoices.

Interstate Capital

Interstate Capital offers same-day funding with advance rates of up to 100% and discount rates starting at 0.49% per invoice. Interstate Capital offers factoring services for specific industries such as transportation, staffing, manufacturing and technology.

Justin is a Sr. Research Analyst at ValuePenguin, focusing on small business lending. He was a corporate strategy associate at IBM.