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Key Takeaways: Is Invoice Factoring a Good idea?
Invoice factoring is often a good idea for B2B companies facing cash flow constraints, as it converts outstanding invoices into immediate cash and removes the delays associated with net payment terms. According to QuickBooks, 61% of small businesses regularly face cash flow issues, making factoring a critical tool for operational survival (QuickBooks, 2023).
- Invoice Factoring Overview: Invoice factoring lets businesses convert unpaid invoices into immediate cash by selling them to a third party, boosting cash flow without taking on debt.
- Benefits of Factoring: It provides quick working capital (often within 24–48 hours), easier qualification than traditional bank loans, no new debt, and outsourced collections.
- Potential Drawbacks: Factoring fees are usually higher than bank financing, but similar to credit card fees, ranging from 1%–5%. Some businesses worry about how customers perceive third-party collection, and recourse factoring carries repayment risk if customers default.
- Ideal Use Cases: Factoring is especially useful for B2B companies facing cash flow gaps, seasonal sales cycles, payroll pressure, or growth—situations that affect a majority of small-to-mid-sized enterprises.
- Choosing a Factoring Company: Businesses should evaluate providers based on flexibility, fees, advance rates, contract terms, and customer service to ensure a strong fit.
Small businesses exploring financing often weigh invoice factoring against other options such as merchant cash advances, asset-based lending, business credit cards, or working with a small business bank. Factoring can stand out for its speed, accessibility, and ability to unlock cash tied up in unpaid invoices, helping businesses maintain steady operations without taking on traditional debt.
In this guide, we’ll break down whether invoice factoring is a smart choice depending on your situation. We’ll cover the basics, outline the pros and cons, and offer expert insight on common concerns like cost and customer perception. Whether you’re looking for a quick answer or a full explanation, this will help you decide if invoice factoring fits your business goals.
What Is Invoice Factoring?
Invoice factoring is a type of financing where a business sells its accounts receivable (outstanding invoices) to a third-party factoring company at a discount. This provides immediate cash flow, enabling businesses to cover operational expenses, payroll, or invest in growth opportunities without waiting for customer payments. Unlike traditional loans, invoice factoring doesn’t add debt to the balance sheet, as it’s not a loan but a sale of assets.
Is Invoice Factoring a Good Idea?
Yes, invoice factoring is a smart, debt-free way to improve cash flow by turning unpaid invoices into immediate working capital. It gives businesses the flexibility to cover payroll, operating costs, or growth opportunities without waiting for customers to pay—especially helpful for companies dealing with long net terms or slow-paying clients.
That’s the quick answer—but here’s where it gets more nuanced:
Invoice factoring is worth it if you’re grappling with cash flow issues because unlike other financing, it’s designed to solve that specific problem. For small and medium-sized businesses, extended net terms cause a lack of cash flow. Factoring fixes this by paying your invoices immediately, allowing you to skip waiting on net terms to get capital you’ve already earned–rather than adding more debt to your balance sheet. With that said, how valuable it is hinges on your specific needs and the factoring partner you choose.
How Invoice Factoring Works
- You apply to sell your outstanding invoices to a factoring company in exchange for immediate working capital. You’ll need articles of incorporation, your government-issued ID, bank statements, invoices, and customer contracts at a minimum. (See more on how to qualify.)
- The factoring company reviews both your business and your customer to ensure they meet credit and risk criteria. Often they will save you time by reviewing your business first to determine if you’re a fit before reviewing your customer.
- If approved, your customer receives a Notice of Assignment, confirming that future payments will go directly to the factoring company. We recommend making the introduction to your customer early so they don’t think you’re being de-frauded.
- The factoring company verifies that your customer has accepted the invoice and agrees to the terms. This is often done via a simple email exchange.
- A percentage of the invoice value-usually between 80% and 100%-is advanced to your business. According to Fundera, the industry average is about 85%, though FundThrough can advance 100% of your invoice value upfront, less our flat fee. (Fundera, 2023).
- The factoring company then manages your A/R and receives full repayment from your customer based on the original net terms. Factoring companies also have professional collections teams–a great value-add as long as they’re careful to maintain positive relationships with your customers.
- Once payment is collected, you receive the remaining balance, minus the factoring fee. With FundThrough, you can skip this step.
A Real Life Example of Invoice Factoring Costs
Let’s say you have a $50,000 invoice:
- You receive an 85% advance, which gives you $42,500 upfront.
- The factoring fee is 2.75% per 30 day payment terms, which equals $1,375.
- When your customer pays the full $50,000, you receive the remaining $7,500 minus the $1,395 fee, leaving you with $6,105.
- In total, you receive $48,605 with an effective cost of factoring is $1,375 for 30 days.
FundThrough can advance up to 100% of your invoice value, minus fees, which means you get more cash upfront without waiting—and the process is typically faster and more streamlined than traditional financing options.
Ready to get paid early?
The Use Cases for Invoice Factoring
According to QuickBooks, 61% of small businesses struggle with cash flow consistently. Per JP Morgan, the average small business holds 27 days’ worth of cash reserves. In contrast, most businesses report needing at least 45 days of runway to safely weather delays in receivables (JP Morgan Chase, 2022). With such limited liquidity, even minor disruptions can jeopardize operations. Investing in growth or seizing new opportunities becomes nearly impossible when simply covering payroll or office rent is a stretch.
If you’re a B2B business and any of the scenarios below resonate with your current situation, you might want to consider the benefits of invoice factoring as a funding option:
- Business Growth or Upcoming Projects: Expansion initiatives and large upcoming projects often require substantial upfront capital–a catch-22 where you need to spend money to make money. Whether you’re hiring new staff or purchasing raw materials in bulk, factoring helps you assure your customer that you’re well-capitalized to get the job done.
- Payroll Needs: Meeting payroll is non-negotiable–and a huge source of stress for many business owners. Factoring ensures you have the cash on hand to pay employees on time, reinforcing team morale and operational continuity.
- Seasonal Fluctuations: For seasonal businesses, revenue goes up and down over the course of a year. Factoring provides a float during the off-season and growth capital during the busy season.
- Save on equipment or materials. Get discounts for buying materials in bulk or equipment in cash.
- Unexpected Expenses: Emergencies and surprise costs don’t wait for ideal timing. Factoring gives you fast access to funds so you can respond to issues immediately and keep your business on track.
- Boosting Cash Reserves: Increasing your available cash enhances your company’s balance sheet — a key signal of stability and attractiveness to investors or lenders.
- Reducing Cash Flow Stress: Constant worry about cash flow takes your focus away from long-term strategy–and your sanity. Factoring offers predictable, steady inflows so you can plan ahead with confidence and reduce financial stress.
All of the above are situations in which funding is needed to grow or remain in business, but cash flow challenges stand in the way. See invoice factoring examples for how factoring helps in these situations.
What are the advantages of factoring?
- Quick Working Capital: Turn unpaid invoices into immediate working capital–in days for your first funding and within 24 hours for future fundings.
- Easier Qualification: Approval is based on your customer’s credit, not your business credit score. Time in business requirements are either short: think 3 months vs. 3 years.
- No Additional Debt: Factoring isn’t a loan, so it won’t affect your debt ratios.
- Outsourced Collections: As long as the Collections team treats your customers professionally, you can save time and money while writing off less A/R.
- Flexible Terms: Providers like FundThrough offer spot factoring, meaning you pick which invoices to fund instead of having to fund all of our A/R. Spot factoring has grown by over 30% since 2020 as businesses increasingly seek control over which invoices they factor (Grand View Research, 2023).
- Outsourced A/R management: FundThrough processes an average of $230K in payments per client per month, saving you time and admin costs.
- Contract insights: Our team has flagged key clauses in customer contracts that required client attention.
- More time for strategic priorities: With steady cash flow, you can spend less time managing money and more time growing the business.
- Option to pass on the fees: Some FundThrough clients have negotiated to have their customers pay factoring fees in special situations.
- Customer credit checks: Get insights into your customers’ credit health to make informed decisions about working with them.
What are the disadvantages of factoring?
On the flip side, it’s also important to consider the disadvantages of receivable financing in the context of your business’ situation:
- Stigma attached to small business invoice factoring: Factoring has had a negative reputation due to bad actors hounding customers for payment. Some business owners worry it will make their customers think they’re financially weak. That perception is changing: the global market for factoring is projected to reach $5.35 trillion by 2029, driven by demand for faster access to cash. For context, this represents a significant jump from $3.2 trillion in 2021, showing a strong trend toward alternative financing (The Business Research Company, 2024).
- Reputation Risk: Some factoring companies damage client relationships with aggressive collections. It’s crucial to work with a provider that treats your customers with care. (We treat your customers like our own.)
- Industry-Specific Suitability: Factoring is only for B2B businesses. While businesses in most industries can factor invoices, it’s most common in oil and gas, manufacturing, fashion, retail, staffing, and professional services.
- Risk type: Recourse vs. Non-Recourse Risk: With recourse factoring, you’re on the hook if your customer doesn’t pay. Non-recourse shifts that risk to the factoring company, but usually at a higher cost.
- Cost Perception: Factoring fees typically range from 1% to 5% per 30 days, often with hidden fees. FundThrough only charges one flat fee. Consider the full value, including A/R support, collections, and customer insights.
5 Questions to Help You Decide if Factoring is Right for You
These five questions will help you decide how much invoice factoring will help you:
- Do you need a cash injection quickly? Traditional bank loans can take weeks, sometimes months, to process, with no guarantee of approval. Only 47% of businesses who applied for a line of credit in 2024 got fully approved. The rest either got less funding than they asked for or got rejected outright. (Source)
- Do you need flexibility in when you can get funding? Lines of credit and business loans may appear flexible but often come with limitations: they exclude newer businesses, require strong credit scores, and have limits on how much capital you can get. Even increasing a credit line can be difficult. Factoring offers on-demand funding, especially if you can choose which invoices you get paid early. (FundThrough also allows unlimited funding for as much as you have in eligible receivables.)
- Do you want to retain ownership in your company? Invoice factoring is a form of non-dilutive financing, meaning you don’t have to give up equity. Unlike some funding options that require ownership stakes, factoring lets you access capital while maintaining full control.
- Do you want to avoid debt? Factoring isn’t a loan — it won’t add to your debt load. Instead, your customer pays the factoring company directly, keeping your balance sheet clean.
- Do you want control over when and how much you fund? Once your customer pays the invoice, the transaction is complete. Some factoring companies require long-term commitments and minimum volume thresholds, while others let you choose which invoices to fund.
Ready to see if invoice factoring is right for you?
How to Choose a Partner that Will Make Early Invoice Payments Worth It
Choosing the right factoring company makes all the difference. If you’re trying to decide whether factoring is a good fit for your business, know that your experience will largely depend on the firm you work with — from speed and support to fees and flexibility.
You can find a detailed comparison in our best invoice factoring companies post (and also check out our best accounts receivable financing companies list). But first, here’s what to look for in any factoring company you’re considering:
- Overall cost of invoice factoring.
Look beyond the rate. Many factoring companies charge hidden fees like processing, service, or maintenance fees. Always request a full cost breakdown.
FundThrough charges a single flat fee with no hidden costs. - Advance rate.
This is the percentage of your invoice you’ll receive upfront. Many factoring companies advance only 80–85%, releasing the remainder (minus fees) once your customer pays.
FundThrough advances 100% of the invoice, minus our fee. - Speed of Funding.
One of factoring’s biggest advantages is speed, but that depends on the provider. Make sure funds are delivered within a day.
FundThrough pays invoices in one day (after your first funding). - Simple application process.
An online application process saves time. Look for providers that use automation and integrate with accounting software.
FundThrough connects with QuickBooks, OpenInvoice, Xero, and Sage so you can skip the paperwork. - Total flexibility.
Some factoring companies require you to fund all invoices from a specific customer or commit to monthly minimums.
FundThrough lets you choose which invoices to fund, with no minimums, no long-term contracts, and unlimited funding for as much as you have in eligible invoices. - Clear SLAs.
Oftentimes, your customer will send all future payments to the factoring company until the Notice of Assignment is terminated to avoid errors and inconvenience. Your agreement with the factoring company should clearly state when and how you’ll receive payments from your customer, including those that you don’t choose to receive ahead of net terms. Ironically, slow payment of these invoices can hinder your cash flow. - Dedicated customer service.
A responsive support team can make all the difference in your experience and help you plan for future funding needs.
FundThrough client support and account managers help you stay ahead of your cash flow.
Key Terms To Help You Find the Right Factoring Service
Accounts Receivable Factoring – This is another term for invoice factoring, a financial solution involves a business selling its unpaid invoices to a factoring company at a discount, receiving immediate cash in return.
Debt Factoring – Often used interchangeably with invoice factoring, the term “debt factoring” can be misleading. Factoring involves the sale of receivables, not the creation of debt, distinguishing it from traditional loans.
Recourse Factoring – In this arrangement, if a customer fails to pay an invoice, the business is obligated to buy back the unpaid invoice or replace it with another. This typically offers lower fees compared to non-recourse factoring since the factoring company assumes less risk.
“Recourse factoring is the most common type of invoice factoring. With a recourse factoring agreement, you are ultimately held responsible for the debt if your customers fail to pay.” – Randa Kriss, Senior Writer & Content Strategist at NerdWallet.
Non-Recourse Factoring – With non-recourse factoring, the factoring company assumes the risk of non-payment if the client’s customer defaults. This provides greater protection for the business but usually comes with higher fees due to the increased risk.
Comparison: Invoice Factoring vs Invoice Financing
What’s the difference between invoice factoring and invoice financing?
Invoice Factoring: Involves selling your unpaid invoices to a factoring company at a discount. The factor advances a percentage of the invoice value upfront and takes over the collection process. Once the customer pays, the remaining balance, minus fees, is remitted to your business.
Invoice Financing: Allows you to use unpaid invoices as collateral to borrow against, much like a line of credit. You retain control over the collection process, and your customers remain unaware of the financing arrangement.
Feature | Invoice Factoring | Invoice Financing |
Ownership of Invoices | Sold to the factoring company | Retained by the business |
Collection Responsibility | Factoring company | Business retains responsibility |
Customer Awareness | Customers are notified | Customers are unaware |
Advance Rate | Typically 80-85% of invoice value | N/A |
Control Over Collections | Limited | Full control |
Is invoice factoring worth it? The bottom line
Factoring can be worth it if your business needs immediate working capital and you’re waiting on slow-paying clients. It offers quick, debt-free funding and collections support, but fees vary and some providers lock you into rigid contracts. It’s important to shop around and understand what you’re getting. The industry is growing fast, with demand rising among small and mid-sized businesses (Grand View Research).
Ready to see if invoice factoring is right for you?
FAQs
Do banks factor invoices?
Yes, some banks provide invoice factoring services, including:
- TAB Bank
- AltLINE (Southern Bank Company)
- Zions Bank
However, many businesses prefer working with specialized factoring companies that offer faster approvals and more flexibility.
Is factoring risky?
Factoring isn’t risky if your customers have a solid payment history. The biggest risk lies in whether you’re using recourse or non-recourse factoring. As long as you’re confident your clients will pay, factoring is a relatively low-risk way to access fast cash without taking on debt. Just be aware that the added security of non-recourse factoring usually comes with higher fees.
Should I use a factoring company?
Use a factoring company if:
- You have strong sales but delayed customer payments
- You need working capital quickly
- You don’t want to take on more debt
- You don’t want to work with banks
How do I choose between factoring and financing?
If maintaining customer relationships and confidentiality is paramount, invoice financing may be preferable. If outsourced A/R, collections, and customer credit ratings are priorities, invoice factoring could be more suitable. They both provide quick, easy cash flow. See our post on invoice factoring vs financing.
Can factoring hurt my relationship with customers?
Factoring hurts customer relationships if the factoring company hounds them for payment. When handled professionally, many customers see it as a simple change of payment details. Many large, well-known buyers pay factoring companies, like Pepsi, Target, FEMA, and ConocoPhillips.
Can I factor international invoices?
Yes, some providers specialize in international invoice factoring. FundThrough can factor invoices across Canada and the U.S.
What industries benefit most from factoring?
Staffing, trucking, manufacturing, and oil & gas are the top users. But it can work for any B2B business with long payment cycles.
What’s the difference between invoice discounting and factoring?
The main difference between invoice discounting and invoice factoring is who manages A/R and customer interactions. With invoice discounting, the business retains control and collects payments. With invoice factoring, the factoring company manages A/R and collects payments directly from customers.
About Kelli McLean
Kelli started out as the one and only account manager working with individual clients to fund their invoices, and is now Head of Revenue. She is an expert in structuring invoice factoring deals that enable small and medium sized businesses to get paid early to improve their cash flow, and is passionate about creating a “can-do” team culture that encourages account executives and managers to find creative solutions for funding clients.