The Ultimate Guide
Invoice Factoring: The Ultimate Guide for SMBs
Everything small and medium businesses need to know about turning unpaid invoices into working capital.
Create a Free AccountWhat Is Invoice Factoring?
Invoice factoring is an accounts receivable financing option where a business sells its unpaid invoices to a factoring company, like FundThrough, in exchange for an advance on the cash. Instead of waiting 30, 60, or 90+ days for a customer to pay, you get most of the invoice's value right away — minus a flat fee.
Factoring is distinct from invoice financing: with factoring, the factor takes on the invoice and collects directly from your customer; with financing, your customer still pays you, and you repay the lender. Because approval is based largely on your customers' creditworthiness rather than your own credit history or years in business, factoring is often easier to qualify for than a bank loan.
Example
Invoice factoring in practice
A staffing company with Net 60 customer terms needs to make payroll every two weeks. It factors $250,000 in invoices at a 3% flat fee — a cost of $7,500 — and receives the advance immediately, covering payroll and freeing up capacity to take on a new client relationship.
Roughly 2.1% of North American businesses use factoring today, according to Capstone research, with particularly strong adoption in staffing, energy, and other fast-growing industries where long payment terms are the norm.
How to Factor an Invoice
The process is more straightforward than most traditional financing.
Create or connect an account
Sign up and optionally sync your accounting software so eligible invoices are pulled in automatically.
Select invoices to fund
Choose which unpaid invoices you'd like advanced — fund as little or as much as you need.
Due diligence
The factoring company verifies the invoice and confirms your customer's ability to pay.
Customer signs a Notice of Assignment
Your customer acknowledges that payment should now be sent to the factor instead of you.
Funds are deposited
You receive the advance — often within a day — directly to your bank account, minus a flat fee.
Customer pays the factor
Your customer pays the factoring company directly according to the invoice's original terms.
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Get Started NowTypes of Invoice Factoring
Factoring arrangements vary in how much of your receivables you commit and who bears the risk of non-payment.
Whole turnover factoring
The factor buys all of your invoices, advancing 70–80% upfront and paying the remainder, minus fees, once collected.
Selective factoring
You choose which invoices and when to fund — no obligation to factor your entire book of receivables.
Spot factoring
Fund a single invoice on an as-needed, emergency basis rather than on an ongoing basis.
Recourse factoring
Your business remains liable if the factor is unable to collect from your customer.
Non-recourse factoring
The factor assumes liability for non-payment — typically at a higher cost.
Maturity factoring
No upfront advance; you're paid on the invoice's original due date rather than in advance.
FundThrough offers cross-border (US/Canada), selective, online factoring — you choose which invoices to fund, whenever you need it, with no monthly minimums.
Pros and Cons of Invoice Factoring
Pros
- Immediate access to working capital
- No new debt added to your balance sheet
- Easier to qualify for than a bank loan or line of credit
- Non-dilutive — you keep full ownership and control
- Funding scales with your invoice volume, with no hard cap
- Fast turnaround — days instead of weeks or months
- Reduces the administrative burden of chasing payments
Cons
- Your customer is notified and pays the factor directly, not you
- There's a learning curve integrating factoring into your bookkeeping
- Fees mean you don't collect 100% of the invoice's face value
Factoring vs. Other Financing
Factoring vs. invoice discounting
With discounting, your invoices serve as collateral for a loan — you typically get an 80% advance, pay interest above prime, and keep managing collections yourself, so your customer never knows a lender is involved. With factoring, advance rates can reach up to 100%, and the factor takes over collections for you.
Factoring vs. bank loans
Banks require lengthy approval processes, established business credit, collateral, and a track record — and reject the majority of small business applications. Factoring offers faster access, easier qualification (since it leans on your customers' credit, not yours), and flexible, on-demand draws.
Factoring vs. a line of credit or overdraft
An overdraft or line of credit is debt — it accrues interest and has a hard limit. Factoring is an advance on revenue you've already earned: no debt, and at FundThrough, no hard cap on how much you can access as your invoice volume grows.
Invoice Factoring FAQs
A factoring company advances funds based on your outstanding invoices, then waits to collect from your customer according to the invoice's net terms — turning a 30, 60, or 90+ day wait into a matter of days.
The remaining percentage is held back as a buffer and paid out, minus the factoring fee, once your customer pays in full. Some factors, including FundThrough, offer advance rates up to 100%.
It depends on the factor's level of automation and how quickly your customer responds to verification. With a technology-driven factor, funding can land in your account within a day of approval; with a manual, paper-based process, it can take longer.
Average discount rates run 1–6% of the invoice value. Watch for hidden costs like termination fees, transaction fees, and monthly minimums — FundThrough charges one flat fee with no hidden fees and no monthly minimums.
No. Online invoice factoring is available across North America, so you can work with a factor regardless of where your business or your customers are located.
What is a factoring company?
A factoring company advances funds based on your outstanding invoices, then waits to collect from your customer according to the invoice's net terms — turning a 30, 60, or 90+ day wait into a matter of days.
Simple. Transparent. Invoice Factoring.
Turn unpaid invoices into working capital in days, not months.
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