Factoring Finance: What It Is & How It Works

Discover how getting your invoices paid in days with FundThrough can help you unblock cash flow and grow your business

What Is Factoring Finance?

Factoring finance – also known as invoice factoring or accounts receivable factoring – is a financial strategy used by businesses to help manage their cash flow. With this strategy, a business owner sells outstanding invoices to a factoring company for fast access to capital. The business owner receives cash for the unpaid invoice amount, less any fees, ahead of the agreed upon payment period. The business owner’s customer pays the invoice amount to the factoring company according to the agreed-upon payment terms. There’s a common misconception that only businesses in financial trouble use factoring finance, but that’s simply not true. Many businesses use it so they can take advantage of a big project that will help them grow, or just to make payroll with peace of mind. Or they’re newly established, and banks won’t approve them for funding.

It’s important to note that factoring finance is different from invoice financing or receivable financing, which is where a factoring company still gives a business owner cash for their invoice, but the business owner pays back the invoice amount themselves, plus a financing fee. Learn about the differences between factoring vs invoice financing.

How Factoring in Finance Works

Factoring finance can be a strategic part of your overall financial plan and funding mix. For example, if you qualify for traditional financial products like business loans, lines of credit, grants, and equity financing, you can use those funding sources to cover expected, fixed, and/or recurring expenses at lower rates.

However, things very rarely go to plan in life and in business, and unexpected cash flow gaps are bound to come up from time to time. This might be an unforeseen emergency, seasonal dips in cash flow, or slow accounts receivable. Using factoring services lets you bridge any cash flow gaps quickly, freeing up funding for work you’ve already completed. A very common use case among our clients at FundThrough is the need for a quick funding boost to meet the constant demands of a growing business. Having a big contract or project come up that will grow your business – as long as you have a healthy cash balance to pay the upfront costs – is no longer a problem when you have a flexible funding source in your back pocket.

How Invoice Factoring Works

Factoring finance, and more specifically, invoice factoring, is a cash management alternative that allows business owners to sell their accounts receivable to a third-party (i.e., invoice factoring companies) at a discount – enabling them to receive cash up front much faster than if they simply waited on the original payment period. While any business could stand to benefit from increased cash flow, receivable factoring is particularly useful for small- to medium-sized companies experiencing cash flow gaps or looking to grow their business. The steps to invoice factoring include:

  • Business owner submits outstanding invoices for funding. Traditional invoice factoring companies often require a business to factor all their invoices for the duration of a contract. Many newer companies let you choose which invoices you want to fund. With FundThrough, you can pick which invoices to fund with no minimum, no maximum, and no long-term contracts.
  • Factoring company does due diligence. Oftentimes this will include checking that a business is legally established, is up-to-date on taxes, and doesn’t have any liens on their accounts receivable and/or the specific invoice. Don’t worry if you have a tax balance or liens: many factoring services will find ways to work with businesses if they have these issues. During this step, the factoring company will also verify that the invoice is real.
  • The business’ customer is asked to sign an NOA. When the customer owing the invoice signs a Notice of Assignment, they’re acknowledging that the factoring company now owns the invoice and that they should redirect payment to them. Some business owners worry about their customer being involved, but many large companies are used to this process. See how we work with your customers for our process.
  • The business owner gets funded. The business owner receives cash in their bank account, less a fee (or, the invoice financing cost) according to their advance rate. (FundThrough gives you the full invoice value minus our fee, meaning we have a 100% advance rate.) The owner now has peace of mind that they have sufficient capital available to grow their business or cover any other cash flow gap. (This is our favorite part!)
  • The customer pays the factoring company according to the invoice terms. When the invoice is due, the customer pays the factoring company and the process is complete.


Control your growth with flexible funding from FundThrough and get:

  • Quick, easy capital
  • Responsive customer service
  • No long-term commitment

Ready to take your business
to the next level?

How Invoice Factoring Is Used

The reason there’s such a demand for the invoice factoring industry is because of cash flow issues caused by the lengthy business to business (B2B) payment cycle. In many industries, it’s not uncommon for standard payment terms to be anywhere from 30 to 120 days! This can leave many small businesses in a tricky financial spot as they wait to receive outstanding payment.

For small business owners with large customers, this can be especially challenging. These big companies have come to expect generous payment cycles that mean you’re waiting months to get paid for your good or services. Maintaining a sufficient cash balance becomes a struggle and makes it difficult to run your business. Business owners are left with stress and anxiety about covering day to day operating expenses or the ability to take on growth opportunities.

Many businesses use factoring finance as a flexible funding boost to cover cash flow gaps such as:

  • Making payroll
  • Purchasing equipment
  • Paying suppliers
  • Hiring staff and temporary workers
  • Fulfilling large orders or projects

Another function of factoring finance is that is provides a resourceful way to take on growth opportunities, and go after new businesses without taking on further debt or equity. Factoring can help businesses with:

  • Taking on more customers
  • Growing their business
  • Funding for a new business traditional financial institutions like a bank won’t fund
  • Adding cash to your balance sheet at strategic times to appeal to investors
  • Getting funding for a timely opportunity (removing the hassle of waiting on bank approval)

The last point is more common than you might think. When a business has access to cash flow, bidding on projects that require them to buy lots of materials or invest in labor aren’t an issue. Companies that may have had to turn down business due to a lack of sufficient capital can now take on the extra volume. Don’t just take our word for it — our customer stories tell the tale. Run Veggie and Global Pipeline are two companies who are clear examples of how invoice funding can help you grow your business.

Factoring Finance Advantages

There are many benefits of factoring finance, especially for businesses that don’t want the hassle or stress of being tied up with a traditional bank loan. Here are a few benefits they typically see

Quick funding

The most important function of factoring finance is that it lets small business owners get invoices paid in a few business days, instead of months. Removing the lengthy net terms associated with many B2B payment cycles means you simplify your cash flow management, and can put your money to work for your business, faster.

No bank hassles

Traditional financial institutions like banks often reject new businesses because they don’t have a years-long financial track record. Without a business credit history or credit score, it can be hard (or impossible!) to secure a bank financing arrangement. And don’t get us started on the lengthy applications! Even to do something as seemingly simple as raising the limit on your business line of credit means preparing financial statements and waiting months for a decision. Growing businesses don’t have this kind of time to wait or they’ll miss out on opportunities. The good news is that depending on the factoring company you work with, you can avoid mountains of paperwork as their application process is much simpler.

Debt-free, non-dilutive funding

Another benefit of factoring finance is that it helps you keep your financials from being weighed down by debt. Factoring is not a business loan — business owners don’t need to pay the money back as it’s simply an advance on work that’s already been completed, and their customer pays the factoring company. Invoice factoring lets you stay in control of your company without giving away equity.

Unlimited funding

The great thing about receivable factoring (at FundThrough, to be specific) is that it provides unlimited access to sufficient capital. Because funding eligibility is based on how much you invoice, the more you invoice the more funding you can receive! This is also known as revenue-based financing.

No long-term commitment

After the invoice is paid by your customer, your obligation is over — no strings attached!

Factoring Financing Disadvantages

Like any financing method, factoring isn’t perfect. Here are the most common perceived disadvantages of factoring finance:

Customer contact required

Some business owners worry that their customer will think their business is in trouble if a factoring company reaches out to them. They may also worry about how a factor will protect their customer relationship. The truth is that many large companies are used to this process. Any factor you choose should treat your customer as their own, and maintain a professional relationship. See how FundThrough treats your customers.

Difficult to record in accounting

Some small business owners find factoring transactions complicated to account for in bookkeeping. Our step by step guide walks you through the process, so you can close your books with confidence. Even if you don’t use QuickBooks, you can apply the same principles to whatever accounting software you use.

Get Convenient Working Capital. Get Invoices Paid in Days.

Invoice your customer. Get paid in days. Get back to business.

mobile payment icon

Easy Access to Capital

Get funding anytime without bank hassles or limits by working with FundThrough. We offer unlimited funding, so the more you invoice, the more capital you can access. Take on growth projects, hire essential staff, and make payroll with peace of mind that you have the funding you need at your fingertips.

holding money icon

Fast, Flexible Funding

Skip waiting on net payment terms and get paid quickly, with a secure source of flexible funding. No debt, dilution, hidden fees, or monthly minimums mean you’re in control of your capital, instead of waiting on slow-paying customers.

wallet with money

Simple Funding Process

Integrations with QuickBooks and OpenInvoice combined with AI and automation make it easy to get funded and get back to business. Get a funding boost in one click (after customer setup).

On Google Reviews:

"FundThrough has been instrumental in helping my company meet its cash flow needs quickly, easily and for low cost." ~Mark B.

"We started using FundThrough in August of 2017. What impressed me the most has been the quick turnaround." ~Ahmed A.

"Overall I have been quite satisfied with FT. I signed up with them about eight months ago and have used the service once. I've also recommended it to other clients." ~Stephanie


What should I look for in factoring finance companies?

When choosing the best factoring finance company for your needs, consider: if the have experience in your industry; their speed and efficiency; fee transparency; the advance rate; and whether they’re invested in your long-term success.

What is an advance rate?

An advance rate is the percentage of the invoice the factoring facility or company pays you upfront. FundThrough has 100% advance rates (minus factoring fee.)

What is FundThrough's pricing?

FundThrough offers transparent pricing so you always know any charges prior to funding an invoice. See our pricing page for details.

Get Your Invoices Paid in Days

Explore fast payments with an experienced fintech

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