Invoice Factoring: What is It and How Does It Work?

Invoice Factoring: What is It and How Does It Work?

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Invoice factoring is a form of business financing that lets you sell your unpaid invoices to a factoring company at a discount for cash upfront. The cash payout you get allows you to access money to cover your immediate expenses.

Invoice factoring may be an attractive funding option for small business owners who do not qualify for traditional loans or would prefer not to take on debt.

How Does Invoice Factoring Work?

Small business owners can contract with a factoring company, known as a factor, to sell invoices at discount in exchange for a cash advance.

There are two types of invoice factoring, in general:

  • 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 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.

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: Generally 60% to 97% of the invoice would be paid upfront. However, there may be rare instances when a company receives a full advance.
  • The reserve amount: Paid after the business’s customer fulfills the invoice, less any fees.

Invoice factoring example

Let’s say Jane owns a clothing manufacturing business and is hoping to steadily increase inventory throughout the year. 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% upfront and receive 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 invoices are paid by Jane’s customers.

Invoice Factoring vs. Invoice Financing

Invoice factoring is different from invoice financing (also known as account receivables financing). Invoice financing is typically defined as the use of account receivables, like 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.

Business owners may have an easier time qualifying for invoice factoring than invoice financing. Because factoring doesn’t involve traditional lending practices, factoring companies are more willing than lenders to work with borrowers who have limited credit histories, little time in business or financial trouble.

On the other hand, invoice financing generally requires strong business credit history and high-quality invoices, although some lenders may be more lenient.

Invoice Factoring Terms and Features

Terms and features of invoice factoring contracts vary between business owners, industries and factoring companies. The following is a sample of average terms and features.

Invoice Due Date15 - 90 days
AmountUp to $5 million
Advance Rate60% - 97%, depending on the industry (some factors may allow 100%).
Reserve Rate0% - 40%
Discount Fee0.25% - 10% weekly or monthly
Funding Time1 - 7 days

Invoice Factoring Companies

Here are a few well-known online invoice factoring companies you could consider to secure funding for your business:


The online lender provides recourse financing, advancing up to about 85% to 90% of unpaid invoices up to $5 million. Weekly rates start at 0.25%. BlueVine requires applicants to serve other businesses or governments, and have at least a 530 FICO score, at least $10,000 in monthly revenue and a minimum of three months in business.

You would need to provide basic details about your business and invoices, as well as three months of bank statements or a connection to your business bank account. BlueVine may ask you to supply more information if you apply for more than $250,000.

If you are an LLC or a corporation, BlueVine does not conduct a hard credit pull, so your credit would not be impacted if you apply. However, if you are a sole proprietorship or a general partnership, BlueVine will perform a credit check after you accept an offer.

Paragon Financial Group

Paragon Financial Group offers non-recourse invoice factoring, providing advances up to 90% of unpaid invoices with fees ranging from 0.90% to 2.50% for the first 30 days. Fees then increase the longer the invoice remains unpaid and are set on a case-by-case basis.

For those seeking to work with Paragon, the company prefers a personal credit score of at least 550 and at least $50,000 in monthly revenue, though it may be possible to get approved with less monthly revenue. In addition, personal credit is not necessarily a disqualifying item, nor does Paragon require a minimum time in business.

Similar to BlueVine, Paragon asks applicants to submit information about the business and its 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


The Southern Bank Company’s altLINE provides recourse invoice factoring. AltLINE does not disclose most of its product details unless you sign up for a free quote, but the bank notes its rates start at 0.50%. It doesn’t charge an application fee and may advance up to 90% of your invoice. If you apply online for invoice factoring from altLINE, expect the bank to review the amount you need, the creditworthiness of your customers, the age of your invoices and the types of invoices you want to sell.

How to Qualify for Invoice Factoring?

Qualifying for invoice factoring usually depends on the details of your invoices: The most important consideration for factoring companies is who’s paying the invoices and when they’re due.

Invoices generally must be:

  • With businesses (B2B) or government (B2G) customers (as opposed to business-to-consumer businesses) with good credit history.
  • Due within a reasonable amount of time (usually 30 to 90 days, though sometimes less).
  • 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.

Your credit history and time in business may be a deciding factor as well, though less important. Some factoring companies require that businesses have at least fair credit and at least a few months in business as a corporate entity (i.e., corporation, LLC, etc.), though others are flexible with these requirements.

Invoice Factoring: Pros and Cons

Before submitting an application for invoice factoring, consider the ways in which this funding option could potentially benefit or hinder your business.


  • Bad credit is OK. Business owners don’t typically need strong credit to be approved for funding.
  • Fast funding. Factoring invoices allows you to quickly access cash for immediate expenses.
  • No debt. Unlike a loan, which requires you to borrow new funds, invoice factoring offers an advance on payments that are already coming to you.


  • High cost. Factoring is typically more expensive than other forms of business financing, like term loans or lines of credit.
  • Customers responsible for payment. Factoring companies expect to get paid when your customers pay their invoices. Recourse factoring would put you on the hook to pay those invoices if your customers fail to do so.
  • Damage to business reputation. The factoring company may become a barrier between you and your customers, which could hurt your relationships.

Invoice Factoring FAQs

Is invoice factoring a good idea? Invoicing factoring is best for B2B (or B2G) companies that work with reliable and reputable customers. If you trust your customers to pay invoices on time, you could sell your invoices to a factoring company for an advance on those unpaid bills. However, you may face steep fees in exchange for fast access to cash and few underwriting requirements.

Is invoice factoring a loan? Invoice factoring is not a loan. Instead of borrowing money, you would sell your unpaid invoices for an upfront cash advance. Rather than requiring repayment, the factoring company would collect a fee when customers pay the invoices.

Why do companies use factoring? Factoring may provide easier access to funds than traditional business financing options, like loans. Eligibility for invoice factoring typically relies on the creditworthiness of your customers, rather than your own personal credit history and financial standing. If approved, you could receive an advance on your invoices in as soon as a couple of hours.

What is the process of factoring? The process of factoring requires business owners to sell their unpaid invoices to a factoring company at a discounted rate in exchange for cash. The factoring company would give you a portion of the unpaid amount upfront. As customers pay their bills, the factoring company would collect a fee before giving you the remaining portion of each invoice.

Melissa is a senior writer for LendingTree, MagnifyMoney and ValuePenguin focused on small business. She previously covered business news for and the Dallas Business Journal. Melissa graduated from the University of North Texas with a bachelor's degree in journalism.