Waiting weeks for a customer to pay can strain your cash flow, so you may be asking what is invoice factoring. It is selling your unpaid invoices to a company that pays you most of their value up front.
For the wider picture, read this site’s overview of small business funding.
| Item | Value |
|---|---|
| Typical advance on invoice value | Up to 90% |
| Typical factor (discount) rate | 1% to 5% |
| Typical customer payment terms | 30 to 90 days |
| Average U.S. time to collect payment, 2024 | 52.6 days |
| U.S. factoring services market, 2024 | $171.98 billion |
These figures come from Sage’s invoice factoring guide and United Capital Source’s factoring cost guide. Figures can change and terms vary by provider and country, so check the source before you rely on them.
How invoice factoring works
Sage describes invoice factoring as an arrangement where you sell your unpaid invoices to a factoring company and receive a large portion of the value up front, in cash (Sage guide, refreshed May 20, 2026). Sage adds that, unlike a traditional business loan, invoice factoring isn’t debt.
The same Sage guide says the process typically works in four steps:
- You sell an unpaid invoice to a factoring company.
- The factor advances a percentage of its value, often 80-90%.
- The factor collects payment directly from your customer.
- Once your customer pays, the factor sends you the remaining balance, minus its fee.
Sage says the advance is usually up to 90% of the invoice’s value, while Fit Small Business (updated May 15, 2025) says a factor may provide up to a 95% advance. That gap is one reason to read each provider’s terms closely.
Unlike a traditional business loan, the arrangement involves three parties, according to United Capital Source: the business selling the invoice, the customer who owes it and the factoring company. Fit Small Business describes it as an advance rather than a loan.
A worked example with numbers
United Capital Source gives a simple example in its factoring cost guide. A construction business factors invoices totaling $10,000 under a 2% discount rate and a 90% advance rate.
- The factor buys the invoices at the discount, for $9,800.
- It advances 90% of that purchased amount, which is $8,820.
- The remaining $980 goes into a reserve account.
Once the customer pays the invoice, the factor releases the reserve to the business, minus any additional fees the contract allows.
Calculations differ between providers. Fit Small Business gives an example with an 80% advance rate and a monthly factor rate of 3%: if the customer repays within 30 days, the factor pays the business the remaining 17%.
What invoice factoring costs
The main charge is the discount rate, also called the factor rate. United Capital Source says most factor rates range from 1% to 5%, but it depends on the company.
Rates usually apply per period that an invoice goes unpaid. The same guide’s example is a 2% fee per 30 days that applies every 30 days until the customer pays, and it notes that some providers charge a lower rate weekly, such as 0.5% per week.
On top of the discount rate, the guide says to beware of these extras:
- Origination fees
- Lockbox or monitoring fees
- Monthly minimums
- Software access charges
The guide also says fee structures can be flat, tiered (rising over time) or hybrid, and that rates depend on invoice volume, average collection times and customer creditworthiness. Fit Small Business warns that fees on invoice factoring can be much higher than other forms of business financing.
Recourse, non-recourse and other types
Fit Small Business explains that recourse factoring holds your business liable if your customer fails to pay the factor. It is higher risk for the business, but rates and fees tend to be lower (Fit Small Business, updated May 15, 2025).
Nonrecourse factoring doesn’t hold your business liable for unpaid invoices. The same source adds that it is only available to businesses with numerous invoices.
Fit Small Business also describes two other arrangements:
- Spot factoring, where you factor specific invoices as needed rather than all of them.
- Contract factoring, where the agreement sets a minimum monthly factoring amount to remain in good standing.
United Capital Source notes that invoice financing is sometimes used as another name, but it more commonly refers to securing a business loan using receivables as collateral.
Who it tends to suit, and the main risks
Sage says invoice factoring works best for B2B businesses, and that it tends to suit sectors with long payment cycles, such as staffing, manufacturing, freight or construction (Sage guide, refreshed May 20, 2026). Sage puts typical payment terms at 30 to 90 days and says the average U.S. business waited 52.6 days to collect payment in 2024.
The same guide says it is generally less suitable for B2C businesses, those with very small invoice values, or companies whose customers have a poor payment history. It adds that the factoring company’s approval is largely based on your customers’ ability to pay.
Sage also reports that the U.S. factoring services market was valued at $171.98 billion in 2024. Size alone does not tell you whether the cost suits a given business.
Based on the sources above, the main risks to weigh are:
- Cost: fees can be much higher than other forms of business financing.
- Customer default: United Capital Source says that if clients default, you might need to repurchase invoices.
- Extra charges: minimums and added fees can sit on top of the discount rate.
- Contract terms: some agreements set monthly minimums, so read them closely.
Alternatives and related options
Invoice factoring is one route among several, and the sources describe invoice financing, a loan secured by receivables, as a related but different product. Comparing total cost, who is liable if a customer does not pay, and how much control you keep over customer contact can show how these routes differ.
Separate guides on this site cover what is equipment financing and merchant cash advance risks for readers who want to compare other routes.
Frequently asked questions
Is invoice factoring a loan?
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In Sage’s framing, factoring is not debt, which separates it from a traditional business loan. United Capital Source adds that “invoice financing” more commonly means a loan secured by receivables, so check which product a provider is describing.
How much of an invoice do you receive up front?
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United Capital Source says businesses can obtain cash advances of 80-90% of the invoice value. Sage says usually up to 90%, and Fit Small Business says up to 95%. The rate depends on the provider and agreement.
Does your own credit matter?
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United Capital Source says approval depends more on clients’ credit than your own. Sage similarly says approval is largely based on your customers’ ability to pay. Providers set their own criteria.
What is the difference between recourse and non-recourse?
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With recourse factoring, your business is liable if the customer does not pay, and rates and fees tend to be lower. Non-recourse does not hold you liable for unpaid invoices but is only available to businesses with numerous invoices, per Fit Small Business.
This page is for general information and education only and is not financial, investment, tax or legal advice.
