Invoice factoring is a financing arrangement where you sell your outstanding invoices to a factoring company at a discount in exchange for immediate cash. The factor collects from your customers directly. You get 70–90% of the invoice value upfront and the remainder (minus the fee) when the customer pays.
Definition
Invoice factoring: Selling your outstanding invoices to a factoring company at a discount in exchange for immediate cash. The factor collects from your customers, then pays you the remainder, minus its fee, when they pay.
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In detail
You issue an invoice to your customer for work completed. Instead of waiting 30–90 days for payment, you sell that invoice to a factoring company. The factor advances 70–90% of the invoice value immediately. When your customer pays the factor, you receive the remaining balance minus the factoring fee (typically 1–5% of invoice value).
In detail
Recourse factoring: if your customer does not pay, you must buy back the invoice from the factor. Non-recourse factoring: if the customer is insolvent, the factor absorbs the loss. Non-recourse is more expensive (higher fees) but protects you from customer credit risk. Most small business factoring is recourse.
In detail
A line of credit is debt — you borrow money and repay it. Factoring is an asset sale — you sell a receivable. Factoring does not appear as debt on your balance sheet and does not require a strong credit score (the factor focuses on your customer's creditworthiness). However, factoring is typically more expensive than a credit line and involves giving up customer payment relationships.
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Usually yes — in traditional factoring, the factor sends a notice of assignment to your customer directing payment to the factor's account. In confidential or non-notification factoring, the customer pays you and you forward payment to the factor, but this structure is more expensive and less common.
Staffing agencies, trucking and freight, government contractors, construction subcontractors, and manufacturing businesses with long-cycle B2B billing. Any business with 30+ day net payment terms and creditworthy customers is a candidate for factoring.
For businesses with cash tied up in receivables but limited credit history or collateral, factoring can be better. For businesses with strong credit and predictable cash flow, a line of credit is usually cheaper. Compare total cost — factoring fees of 3–5%/month translate to 36–60% annual cost if you factor continuously.
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lendfloCapital is a business financing broker, not a lender. This page is general information, not financial, legal or tax advice. Rates, amounts and terms depend on the lender and your business.
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