What Is Invoice Factoring? How It Works, What It Costs, and Who It's For

A trucking company owner in Grand Junction had $320,000 in outstanding invoices from three freight brokers. Businesses across Ohio and Pennsylvania face the same receivables gap. All on Net 60 terms. Meanwhile, his fuel bill was running $9,200 a week, two drivers needed payroll by Friday, and a brake job on his lead truck couldn't wait. He had $11,000 in checking.

He wasn't broke. He had plenty of money. It was just trapped in invoices that wouldn't pay for another 40 days.

We got him set up with a factoring line in 72 hours. He submitted $200,000 in invoices, had $180,000 in his account the next morning, and never missed a single obligation. That's invoice factoring in a nutshell.

So How Does It Actually Work?

Factoring is simple. You sell your unpaid invoices to a factoring company. They give you most of the money right away. When your client pays, the factor takes their cut and sends you the rest.

Here's the step-by-step:

You do the work and send your invoice. Net 30, Net 60, Net 90 — whatever terms you agreed to with your client.

You send that invoice to a factoring company. Along with basic proof — a signed contract, delivery confirmation, that kind of thing.

The factor advances you 80% to 95% of the invoice value. This happens within 24 to 48 hours. Sometimes same day. On a $100,000 invoice with a 90% advance rate, you're holding $90,000 by tomorrow.

Your client pays the factor directly. When the invoice comes due, payment goes to the factoring company, not you.

The factor sends you the remainder minus their fee. If the fee is 3% on a $100,000 invoice, they keep $3,000 and wire you the remaining $7,000.

Bottom line: instead of waiting 60 days for $100,000, you get $90,000 tomorrow and $7,000 when your client pays.

What It Costs — Real Numbers

Let's use that trucking company as an example. Here's what factoring looked like on a chunk of his invoices:

That $6,000 is the cost of getting $180,000 in your account within 24 hours instead of waiting two months. For a trucking company burning $9,200 per week on fuel alone, that trade-off isn't even a question.

One thing to know: factoring fees typically compound per 30-day period. If your client takes 60 days to pay instead of 30, that fee might double to 6% ($12,000). Faster-paying clients mean lower costs for you. Use the loan cost calculator to model different scenarios.

See what 70+ lenders will offer your business.

Here's What Most People Get Wrong

They think factoring is a loan. It's not.

You're selling an asset — your receivable — at a small discount. No debt goes on your balance sheet. No monthly loan payments. The factor collects directly from your client.

This matters for three reasons:

• Your credit score is almost irrelevant. The factor cares about your client's ability to pay, not yours. If you're invoicing Fortune 500 companies, you can qualify with a 550 credit score.
• No impact on your debt-to-equity ratio. It's an asset sale, not a liability.
• No fixed monthly payments draining your account. The repayment happens when your client pays.

I've worked with contractors who couldn't get a $50,000 line of credit because of thin credit history, but qualified for $500,000+ in factoring because their clients were rock-solid.

That's a huge distinction most people miss.

Who's This Built For?

Factoring works for B2B businesses with creditworthy commercial clients. The industries I see using it most:

• Trucking — Freight brokers pay Net 30 to Net 60, but fuel and maintenance are daily expenses.
• Manufacturing — Large orders for retailers create massive receivable balances.
• Construction — Subs and GCs routinely wait 60 to 90 days for payment on completed work.
• Wholesale — Distributors ship on credit terms but need cash to restock.
• Staffing agencies — Payroll is weekly, client invoices are monthly.
• Attorneys — Law firms use factoring for case settlement receivables, bridging the gap between winning a case and collecting payment.

Factoring also pairs well with purchase order financing when you need capital to fulfill a large order before invoicing. The common thread: you're doing work for established companies, and the gap between finishing the job and getting paid is killing your cash flow.

Factoring vs. a Line of Credit

Both solve cash flow gaps, but they work differently.

A business line of credit is revolving credit based on your revenue and credit profile. More flexible — you don't need invoices to draw funds. But harder to qualify for if your credit history is limited.

Factoring is easier to access because qualification is based on your clients, not you. But it's tied to invoices. No receivables, nothing to factor.

Honestly, I tell most B2B business owners to get both if they can. Your line of credit handles day-to-day cash flow. Factoring handles the big invoices that would otherwise create a 60- or 90-day hole. Using the wrong tool for the wrong job is how you overpay.

Recourse vs. Non-Recourse

Most factoring is recourse, meaning if your client doesn't pay, you owe the advance back. Non-recourse factoring exists — the factor eats the loss if your client defaults — but it's less common and more expensive.

In practice, this matters less than you'd think. Factoring companies vet your clients before they'll accept an invoice. If they agree to factor it, they're already confident the client pays their bills.

Watch Out For These Traps

Long-term contracts. Some factors lock you into 12- to 24-month commitments with volume minimums. Look for month-to-month or spot factoring if you want flexibility.

Hidden fees. Beyond the factor rate, watch for application fees, wire fees, monthly minimums, and early termination fees. Ask for the complete fee schedule before you sign anything. Our guide to reading a business loan offer covers what to look for.

Notification factoring. Some factors tell your client directly that payments should go to them. If you'd rather keep the arrangement private, ask about non-notification options.

Getting Started Is Fast

For businesses that need broader funding beyond receivables, commercial financing offers additional options for growth capital. This isn't like applying for an SBA loan. You can get set up in days, not months.

1. Know your invoices. Which clients do you invoice? What's the average size? What are the payment terms?
2. Apply. Through our network of 70+ lenders, we can match you with factors that specialize in your industry.
3. Submit invoices. Once approved, you send invoices as you generate them. Funds hit your account within 24 to 48 hours.
4. Factor as much or as little as you want. No obligation to factor every invoice. Use it when you need it.