How invoice factoring works
You deliver goods or services and issue an invoice on 30 to 90 day terms. The factor verifies the invoice, advances 80 to 95 percent of its value, usually within a day, and notifies your customer to pay the factor on the due date. When the customer pays, the factor releases the reserve, the remaining 5 to 20 percent, minus its fee. Facilities run continuously: each new invoice is sold as it is issued, so cash arrives on delivery rather than on the customer’s schedule.
Spot factoring sells single invoices; whole-ledger factoring sells all of them. Notification factoring tells the customer; non-notification keeps the relationship private but costs more and needs stronger credit. In freight factoring, the most common variety, carriers factor rate confirmations and delivered loads, often with fuel cards attached.
What factoring costs
Fees are quoted per 30 days outstanding, about 1 to 5 percent of the invoice, sometimes tiered by days. A $20,000 invoice at 2.5 percent paid in 45 days costs about $750. Add-ons to check: setup fees, monthly minimums, wire fees, invoice-processing fees, termination fees and the reserve release timing. The effective annual cost on a 45-day invoice at 2.5 percent is roughly 20 percent, which is competitive with unsecured products, but a slow-paying customer raises it fast.
| Days to customer payment | At 1.5% per 30 days | At 2.5% per 30 days | At 4% per 30 days |
|---|---|---|---|
| 30 days | $300 | $500 | $800 |
| 45 days | $450 | $750 | $1,200 |
| 60 days | $600 | $1,000 | $1,600 |
| 90 days | $900 | $1,500 | $2,400 |
| Product | Amount to discuss | Time to fund | Pricing structure | Eligibility review |
|---|---|---|---|---|
| Invoice factoring | Provider-specific; size to repayment capacity | Provider-dependent; confirm availability of funds | Contracted invoice fee, fee period, reserve and any additional charges | Provider assesses business and eligible invoices; Customer and owner checks depend on the agreement |
| Business line of credit | Provider-specific; size to repayment capacity | Provider-dependent; confirm availability of funds | Interest or installment fees by provider; check draw and maintenance charges | Operating-history requirements vary by provider; Ask which personal and business credit checks apply |
| Working capital loan | Provider-specific; size to repayment capacity | Provider-dependent; confirm availability of funds | Quoted interest or factor pricing and fees; compare the complete payment schedule | Operating-history requirements vary by provider; Ask which personal and business credit checks apply |
| Business term loan | Provider-specific; size to repayment capacity | Provider-dependent; confirm availability of funds | Quoted interest and fees; compare net proceeds and total repayment | Operating-history requirements vary by provider; Ask which personal and business credit checks apply |
Recourse and non-recourse
Under recourse factoring, the standard form, an invoice the customer does not pay within a set period, often 90 days, is charged back to you or replaced with another invoice. Under non-recourse, the factor absorbs the loss if the customer becomes insolvent, for a higher fee, but disputes, short-pays and returns are still your problem. Most small businesses use recourse and price it accordingly; non-recourse suits businesses with a few large customers where a single insolvency would be severe.
Who qualifies and which industries use it
The factor underwrites your customers: their credit, payment history and whether the invoice is for delivered, documented work with no disputes. Your own credit and time in business matter far less, which is why factoring is available to businesses under a year old and to owners with challenged credit. What you need is a B2B customer base on terms, clean invoicing with proof of delivery, and no existing lien on the receivables. Trucking, staffing, manufacturing, wholesale and distribution, construction subcontractors, security and janitorial contractors, and professional services firms with corporate or government clients are the heaviest users. Retail, restaurants and any business paid at the point of sale have no invoices to factor.
Have this ready
Factoring application file
- Accounts-receivable ageing report
- Sample invoices with proof of delivery or signed timesheets
- Customer list with contact details
- Three months of business bank statements
- Formation documents and EIN
- Any existing UCC filings on receivables
- For carriers: MC/DOT authority and rate confirmations
How factoring companies differ
Factors specialise by industry, size and structure. Freight factors offer same-day advances, fuel cards and load-board integrations; general factors serve staffing, manufacturing and services; some focus on government receivables or on invoices above certain sizes. Terms that differ between companies: advance rate, fee structure and tiers, minimum volume, contract length and termination notice, whether the facility is recourse, reserve release speed, and whether notification is required. Compare two or three on a real invoice sample rather than on headline rates; Now Biz Fund does that across factoring partners on one application.