Invoice factoring is the sale of unpaid invoices to a factoring company at a discount. The business gets most of the invoice value up front, usually between 70% and 90% according to the Office of the Comptroller of the Currency, and the rest, minus a fee, after its customer pays the factoring company. As an example, a $50,000 invoice with an 85% advance and a $1,500 fee pays the business $42,500 now and $6,000 later.
In the Federal Reserve Banks' 2026 Report on Employer Firms, 3% of employer firms regularly used factoring, compared with 36% for lines of credit, while 50% reported uneven cash flow, which the survey defines to include collecting on receivables.
Today Capital Group does not offer factoring. We do arrange lines of credit and revenue-based financing, which suit owners who would rather keep their invoices, and those follow the factoring details.
How invoice factoring works
Factoring applies to sales made on terms, where the work is finished and the money is 30 or more days away. A typical arrangement runs in five steps.
- You sign a factoring agreement, and the factoring company reviews your customers, because its money depends on whether they pay.
- You deliver the goods or finish the work, then send the invoice to the factoring company.
- The factoring company pays you an advance, which is a set share of the invoice, and holds back the rest as a reserve.
- Your customer is told to pay the factoring company, which tracks the invoice and handles collection.
- When the customer pays, the factoring company takes its fee out of the reserve and sends you what is left.
Three numbers decide what you keep. The advance rate is the share you receive up front. The reserve is the share held back, which the Federal Reserve's Commercial Bank Examination Manual (section 2180.1, on banks that factor invoices) explains as the factoring company's access to funds for later adjustments such as returns and shipping disputes. The factor fee is the price, usually a percentage of the invoice that grows the longer the invoice stays open.
What invoice factoring costs on a $50,000 invoice
The figures below are an example only, not a quote or the terms of any factoring company. Say a wholesale distributor invoices a retail chain $50,000 on net-45 terms. The factoring company advances 85% and charges 2% for the first 30 days, plus 1% for each further 15 days or part of 15 days.
| Step | Example amount |
|---|---|
| Invoice total | $50,000 |
| Advance paid to the distributor at 85% | $42,500 |
| Reserve held back at 15% | $7,500 |
| Fee when the customer pays on day 45 (3%) | $1,500 |
| Reserve released, $7,500 minus the fee | $6,000 |
| Total the distributor receives | $48,500 |
The fee follows the customer's payment date, so the same invoice costs more when the customer takes longer.
| Customer pays on | Fee | Reserve released | Total received |
|---|---|---|---|
| Day 30 | $1,000 | $6,500 | $49,000 |
| Day 45 | $1,500 | $6,000 | $48,500 |
| Day 60 | $2,000 | $5,500 | $48,000 |
| Day 90 | $3,000 | $4,500 | $47,000 |
If the distributor factored one $50,000 invoice a month and each paid on day 45, the fees would come to $18,000 a year on $600,000 of sales. On a 10% margin, the $1,500 fee is 30% of the $5,000 earned on each invoice. In return, the Federal Reserve's manual notes, the business needs no credit department to evaluate customers, collect past-due accounts or keep receivable records.
The International Trade Administration's Trade Finance Guide puts one form of export factoring at 1% to 4%, depending on the country, sales volume and paperwork. Quotes on domestic invoices vary with your customers' credit, your terms and your volume, so compare them in dollars on one real invoice.
Recourse and non-recourse factoring
This term decides who takes the loss when a customer cannot pay. With recourse factoring, an invoice still unpaid after a deadline in the contract comes back to you, and you repay the advance and the fee so far. On the example invoice at day 90, that is $42,500 plus $3,000, or $45,500.
With non-recourse factoring, the factoring company takes the loss if the customer cannot pay because of its credit, and that protection is priced into the fee. The Federal Reserve's manual adds two limits, saying shipping disputes, errors and returns are usually charged back to the client, and that sales made without the factoring company's approval carry full recourse.
Notification and what your customer sees
In most factoring your customer finds out, because the invoice carries a notice that it has been assigned and a new place to send payment. Under section 9-406 of the Uniform Commercial Code (each state adopts its own version), a customer can pay you until it receives that notice, and after that only paying the factoring company clears the debt.
So the customer's accounts payable team sees a changed payee, and when an invoice runs late it hears from the factoring company instead of you. Tell your largest customers before the first notice arrives, since an unexplained change of payee can get a payment held. Some agreements are non-notification, meaning customers are not told and you collect as usual, then pass the money on, so ask whether that is available and what it adds to the cost.
How long factoring takes to set up
The first funding takes the longest. The factoring company reviews your customers and open invoices, searches for liens against your business, and files its own UCC-1, since Article 9 of the UCC covers sales of invoices as well as loans secured by them. A filing already on your receivables can add time, because whoever holds it has to release it or agree to share, and our guide to UCC liens explains how those filings work.
Later invoices move faster, since the contract and most customer checks are done. Timelines differ by company, so ask for a first-funding date in writing.
Factoring versus accounts receivable financing
Accounts receivable financing, also called AR financing or invoice financing, is a loan or line of credit secured by your invoices, which you still own. The Federal Reserve's manual draws the line at risk, with the client keeping the credit and collection risk in accounts receivable financing and passing it to the factoring company in factoring. The SBA's summary of invoice financing adds that your clients keep paying your business and you stay in control of collections.
Banks and finance companies set the limit with a borrowing base, which moves with your eligible invoices. The OCC's handbook on asset-based lending says common advance rates run from 70% to 85% of eligible receivables, with some banks going up to 90% on business-to-business invoices. Invoices commonly left out include those badly past due, those owed by affiliates, government or foreign customers, and unbilled amounts, and the lender often controls receipts through a lockbox.
| Invoice factoring | Accounts receivable financing | |
|---|---|---|
| What happens to the invoice | You sell it | You pledge it as collateral |
| Who your customer pays | The factoring company, after notice | You, or a lockbox the lender controls |
| If the customer cannot pay | Depends on recourse or non-recourse | You still owe the loan |
| How the cost is charged | A fee on each invoice | Interest on the balance, plus charges such as field audits |
What to check in a contract with a factoring company
Get these answers in writing before you sign.
- Check whether you must factor every invoice, because the Federal Reserve's manual says the typical agreement assigns all of a client's receivables.
- Ask whether the fee is charged on the full invoice or only the advance, how often it steps up, and what else you pay in dollars, including interest on the advance, per-invoice fees, wire fees and any monthly minimum.
- Find out when the reserve is paid, what can be charged against it, and how many days pass before an unpaid invoice comes back to you.
- Read the chargeback terms for disputes, returns and short payments against your own history, since the OCC says these reductions are usually expected to be 5% or less of receivables.
- Check the term, the renewal date and any early exit charge, and ask how the UCC-1 will be ended when you leave, because a filing stays effective for five years under section 9-515 unless it is terminated.
- Read the lien language to see whether it covers only the invoices sold or all your receivables, and whether it bars other claims on them, since section 9-322 generally ranks competing claims by filing date.
- Raise any federal customers early, because the Assignment of Claims rules allow assignment only to a bank, trust company or other financing institution, with written notice to the contracting officer.
Who invoice factoring suits
Factoring fits a business that sells to other businesses on terms, has customers with stronger credit than its own, and produces invoices steadily. The Federal Reserve's manual describes factoring clients as generally small or start-up firms with limited liquidity that do not qualify for more traditional bank financing. It also fits owners who want someone else to handle collections. Freight has its own version, covered in our trucking financing guide.
It fits less well when customers are consumers, when one or two customers make up most of your invoices (the OCC treats a single account at 10% or more of receivables as a concentration), when disputes and returns are frequent, or when margins are thin.
Other ways to get paid sooner and keep your invoices
Start with the invoice, because asking costs nothing. A deposit, progress billing or shorter terms all bring money in earlier, and so does an early payment discount if the customer takes it. As an example, 2% off for payment within 10 days costs $1,000 on a $50,000 invoice and brings in the other $49,000 about 35 days sooner than net-45.
When the gap still needs funding, we arrange the two products below. Nobody buys your invoices, and your customers keep paying you as they do now. Our guide to working capital loans covers the wider set of options.
A line of credit for the gap between invoice and payment
A business line of credit gives you a limit of up to $2,000,000 through our network, with offers in one to two business days. You draw when costs run ahead of an invoice, repay weekly or monthly on what you have drawn, and the room opens up again as you pay it down. Funders look at revenue first, with more weight on credit than for an advance.
You pay only on the amount that is out. At an example charge of about $92 a week for every $20,000 outstanding, the distributor's $42,500 would cost about $1,260 if the full balance stayed out for 45 days. That is not a quote, and some lines charge a flat fee on each draw. Payments run on the line's schedule, often before the customer has paid, so check that they fit, and you keep doing the credit checks and collections that a factoring fee would cover.
Our guide to business cash flow loans works through a 45-day receivables gap week by week, and line of credit vs term loan compares a line with a lump sum on a fixed schedule.
Revenue-based financing for a one-time cost
Revenue-based financing from $5,000 to $2,000,000 is a merchant cash advance. A funder buys part of your future sales in advance, sizes the amount on your usual revenue, and collects a set daily or weekly payment until the agreed total is paid. The decision rests mainly on four months of business bank statements, it usually needs no collateral, and most applicants are funded within one to two business days of choosing an offer.
The cost is quoted as a factor rate, a multiplier set at signing, which is a different thing from a factoring company's fee. As an example, a $50,000 advance at a factor rate of 1.25 has a total payback of $62,500, so the cost is $12,500, and 25 weekly payments of $2,500 would pay it off in about six months. That total is fixed when you sign, so a customer paying late does not change it. An advance suits one cost with a clear end, such as a bulk order at a supplier discount. Our guide to merchant cash advance payments shows how set daily and weekly payments are worked out.
If you already factor your invoices, say so when you apply
A factoring agreement can bar other claims on the same receivables, and the factoring company's UCC-1 appears when a funder searches your business name. Say so when you apply and send us the agreement, so the file goes only to funders that work alongside factoring. If you hold an advance or a line and are considering factoring, read those agreements first, because they may restrict selling your receivables.
How to apply for a line of credit or an advance through us
Start with the short application and four months of business bank statements as PDFs. Getting matched does not need a hard credit pull, since most funders prequalify from bank statements and a soft pull. The funders we work with generally look for about a year in business and about $20,000 a month in deposits. If you're not there yet, apply anyway. Some funders work with newer or smaller businesses, and we'll tell you what's realistic. One application goes to the funders in our network, the offers come back side by side, and we go through them with you before anything is signed. There is nothing to pay to apply or to see offers. To talk through which one fits your invoice cycle, call (818) 351-0225.
Frequently asked questions
What is invoice factoring?
Invoice factoring is the sale of unpaid invoices to a factoring company at a discount, in which the business receives most of the invoice value up front, usually 70% to 90%, and the rest, minus a fee, after its customer pays the factoring company.
How much does a factoring company charge?
A factoring company charges a fee on each invoice, usually a percentage that grows the longer the customer takes to pay, so in an example with 2% for the first 30 days and 1% for each further 15 days, a $50,000 invoice paid on day 45 costs $1,500.
What is the difference between invoice factoring and accounts receivable financing?
Invoice factoring sells the invoice to a factoring company, which usually collects from your customer, while accounts receivable financing is a loan or line of credit secured by your invoices, so you keep collecting and still owe the money if a customer does not pay.
Will my customers know I am factoring my invoices?
Usually yes, because your customer receives a notice to pay the factoring company, and once notified it clears its debt only by paying that company, although some agreements are non-notification and leave collection with you.
Can I get a line of credit or an advance if I already factor my invoices?
Sometimes, but a factoring agreement can bar other claims on the same receivables and the factoring company's UCC-1 appears in a lien search, so say so when you apply and the file can go only to funders that work alongside factoring.
