Invoice Factoring

Is Invoice Factoring Considered a Loan?

Is factoring considered a loan? This question comes up often when business owners, CEOs, and finance leads are deciding whether invoice factoring services are the right funding option for their business. It’s important to know whether the financing option you’re considering will require you to take on debt – both for your balance sheet and your own peace of mind. If your goal is to improve cash flow, loan payments can ironically end up doing just the opposite. And slowing down your cash flow down is the last thing you want to do to your business. This is why many business owners consider invoice financing options to manage cash flow shortfalls and grow their business. 

Here’s the short answer: Is factoring considered a loan?

No, factoring services are not considered a bank loan. Bank loans are borrowed money you have to repay, and they are a liability. They also count as debt on your balance sheet. With accounts receivable factoring, you aren’t borrowing money; you’re simply changing who owns the invoice and who collects payment from your customer. Because of this, factored invoices aren’t counted as a liability, making them a great funding source for businesses that are new or growing. 

If you want more details, read on.

Invoice Factoring Meaning

To understand why accounts receivable factoring is not a loan, you first need to have a clear understanding of what factoring receivables is. To keep things short and sweet, invoice factoring is when a business sells its outstanding invoices to a factoring company in exchange for funds ahead of the original payment terms – often 30, 60, or 90 days. Invoice factoring sometimes goes by the names accounts receivable financing, invoice funding, or factoring receivables.

Master Your Cash Flow

Everything you need to master cash flow basics in a comprehensive guide and template.

What Is the Difference Between a Loan and Factoring?

With traditional business loans, you go through a rigorous process with a lender requiring lots of paperwork and several years of financial history. The financial institution will often check your credit rating and business credit history to determine if your business is a credit risk. You then wait several months for a decision. If you get approved (difficult for new businesses, or even established businesses sometimes), you get your loan proceeds. Then you have to pay back the loan proceeds in installments, with interest, according to the terms you agreed to with the bank. This funding option may not even be available to your business if you haven’t been established for a certain minimum period of time, are in financial difficulty, or can’t prove the financial strength of your business.

Here’s how it goes with invoice factoring:

  • After choosing your factoring provider you’ll create an account and submit some information about your business, like articles of incorporation and your business bank information. (FundThrough’s online application process makes it easy to get started.)
  • Once an invoice financing company processes your application, you can submit an outstanding invoice for funding.
  • After the invoice financing company does its due diligence (verifying your customer’s information and the invoice), your customer will be asked to sign an NOA, or notice of assignment. This just means your customer acknowledges they need to redirect payment for the unpaid invoice to the invoice factoring provider by the due date.
  • Funds are then deposited to your business bank account as soon as the next business day after approval.
  • The factoring company works with your customer to settle the outstanding receivables according to the original payment terms, and you don’t have to manage accounts receivable or worry about chasing customer payment. (If this concerns you, see how FundThrough treats your customers like our own.)


Here are the main differences between factoring receivables and loans:

  • With a loan, you have to pay back the loan proceeds yourself. With receivable financing your customer pays the factoring company their invoice according to net terms.
  • Loans have an extensive application process and high rejection rate. The factoring process doesn’t require much paperwork and is easier to get approved for as it depends more on whether or not your customer is credit worthy. Factoring agreements can be arranged in much less time and with less hassle than bank financing.
  • Loans can take months to get approved. Receivable factoring can get you funds in a few days, especially once the initial account setup is complete.
  • Loans require administrative time and cost to ensure you make on-time payments. The factoring process doesn’t require that.
  • You still have to collect payment from your customer with a loan. When factoring receivables, the customer pays the factoring company.
  • Loans can be a less expensive form of financing than factoring, especially if your factoring company charges hidden factoring fees. (At FundThrough, our invoice factoring rates are fully transparent — what you see is what you get.)
  • Loans don’t require your customer to be involved in the process. The factoring process requires customers to redirect payment to the factor, so they do require contact. See our approach if this worries you. (But rest assured we value your client relationship just as much as you do.)
  • Banks charge an interest rate on loans. Factoring companies charge what is called a discount rate, which is a percentage of money they withhold from your cash advance as their fee.


Is debt factoring a loan?

The answer is also no, debt factoring is not a loan. Debt factoring is another term for invoice factoring. It’s easy to mistake debt factoring for a loan with the word “debt” in the term. 

Is factoring considered asset based lending?

Business factoring loans are not asset based lending even though it is based on an asset: your invoices. Since you’re not borrowing money that has to be repaid, it’s not considered a loan. An asset-based loan is a type of loan or line of credit that is typically secured by inventory, real estate, or equipment.

Explore fast payments with an experienced fintech

Interested in possibly embedding FundThrough in your platform? Let’s connect!