Article
Invoice Factoring: How It Works and What It Really Costs
Short answer
Factoring means selling unpaid B2B invoices to a factoring company for an advance, usually most of the invoice value, then receiving the rest minus a fee when your customer pays. It turns slow receivables into cash. The cost depends heavily on how long customers take to pay, because many fees accrue per period the invoice stays open.
Key points
- Factoring relies largely on your customers' credit, so young businesses with strong customers can qualify.
- Recourse factoring leaves you on the hook if the customer doesn't pay; non-recourse shifts some of that risk, usually for a higher fee and with limits.
- Ask for the fee schedule as a function of days outstanding, plus every other fee, and convert it to an APR.
- Your customers usually learn you factor, because they're told to pay the factor.
For a business that sells to other businesses, the problem is often not profit but timing: you did the work, sent the invoice, and the customer pays in 45 or 60 days while payroll is due Friday. Factoring is built for that gap.
The mechanics
- You invoice your customer as usual.
- You sell the invoice to a factor, which advances a large share of its face value, often within a day or two.
- Your customer pays the factor directly.
- The factor sends you the remaining balance (the reserve) minus its fees.
Because repayment comes from your customer, the factor cares mostly about the customer's creditworthiness and whether the invoice is valid and undisputed. That's why factoring is common in trucking, staffing, manufacturing and wholesale, and available to young companies with strong customers.
How it's priced
Factoring fees are quoted many ways: a flat percentage per invoice, a percentage per 10, 15 or 30 days the invoice is outstanding, or a base rate plus a margin on the advanced amount. On top of that may be application, due-diligence, ACH, wire, lockbox, credit-check, monthly minimum and termination fees.
The key is that cost scales with time. Here's an illustrative fee schedule (not a quote from any company) to show the effect: a 2% fee for the first 30 days and 1% for each additional 15 days, on a $20,000 invoice with an 85% advance ($17,000).
| Customer pays in | Fee | Fee as APR on the $17,000 advanced |
|---|---|---|
| 30 days | $400 | about 28.6% |
| 45 days | $600 (2% + 1%) | about 28.6% |
| 60 days | $800 | about 28.6% |
| 90 days | $1,200 | about 28.6% |
That flat APR is a feature of this particular schedule, where each extra day costs the same. Schedules that front-load the fee (a large flat fee in the first period) are far more expensive in APR terms when customers pay quickly. The APR here is simple interest: fee ÷ advance × 365 ÷ days. Always ask for the fee at your customers' actual average days-to-pay and add every other fee before comparing.
Recourse or non-recourse
- Recourse: if the customer doesn't pay within a set period, you buy the invoice back or replace it. Cheaper, more common.
- Non-recourse: the factor absorbs the loss if the customer can't pay because of insolvency, usually not if the customer disputes the work. Costs more and comes with tighter customer approvals.
Practical issues
- Customer relationships. Customers get a notice of assignment telling them to pay the factor. Most are used to it; some aren't.
- UCC filing. Factors usually file a UCC-1 lien on your receivables, which can block a bank line later. Ask what it covers.
- Contract length and minimums. Long terms, auto-renewal and monthly minimums can make factoring expensive to exit.
- Disclosures. California and New York require disclosures, including APR, for many factoring transactions.
When it makes sense
Factoring tends to fit when you sell to creditworthy businesses on long terms, are growing faster than a bank line can follow, or don't yet qualify for a bank line. As the business matures, many owners move to an asset-based line of credit, which uses the same receivables as collateral but is typically cheaper. To compare a factoring quote with a loan, convert both to APR: the simple formula above for the factoring fee, and our APR calculator for the loan.
Sources
- CFPB Regulation B §1002.9: notice rules apply to credit incident to a factoring agreement
- California DFPI: commercial financing disclosure regulations (cover commercial factoring)
- Orrick: New York's commercial finance disclosure law covers factoring companies
Checked November 9, 2026. Program rules and scoring models change; the source is the authority.