By Tera Loans Editorial · Published June 18, 2026
Invoice Factoring Explained: Costs, Pros, and How It Works
A practical guide to invoice factoring for business owners: how it works, real factoring fee costs, advance rates, recourse vs. non-recourse, and when it beats a loan.
Invoice factoring is the sale of your unpaid B2B invoices to a factoring company at a discount in exchange for immediate cash. You typically receive 70% to 90% upfront within a day or two, the factor collects from your customer, then pays you the rest minus a fee of roughly 1% to 5% per 30 days. It is financing, not a loan.
If your business sells to other companies on net-30, net-60, or net-90 terms, you already know the problem: the work is done, the invoice is sent, but the cash sits idle for weeks while payroll, suppliers, and rent keep coming due. Invoice factoring exists to close that gap. This guide breaks down exactly how it works, what it really costs, and when it makes sense over a term loan or line of credit.
How does invoice factoring work?
Factoring converts a receivable you already earned into cash today. The mechanics are consistent across most factors:
You sell on credit terms
You deliver goods or services to another business and issue an invoice due in 30, 60, or 90 days.
You sell the invoice to a factor
You assign the invoice to a factoring company. They verify the work was completed and that the invoice is legitimate.
You get an advance
The factor advances a percentage of the invoice value (commonly 80% to 90%) to your account, often within 24 to 48 hours.
Your customer pays the factor
Your customer remits payment directly to the factor when the invoice comes due.
You receive the reserve
The factor releases the remaining balance (the reserve) to you, minus their discount fee.
Because approval rests largely on the credit quality of your customers rather than your own, factoring is often available to younger companies or those with thin credit that would struggle to qualify for a bank loan.
The core idea
You are not borrowing against your invoices, you are selling them. That means no new debt on your balance sheet, and qualification hinges on whether your customers pay their bills, not on your personal FICO or years in business.
What does invoice factoring actually cost?
The headline number is the discount fee (sometimes called the factoring rate), charged as a percentage of the invoice for each period it stays unpaid. The longer your customer takes to pay, the more you owe. Watch for add-on fees too: setup, ACH/wire transfer, monthly minimums, and due-diligence charges can quietly raise your effective cost.
| Discount fee | Days to pay | Total fee | Effective cost |
|---|---|---|---|
| 1.5% / 30 days | 30 days | $750 | 1.5% of invoice |
| 3% / 30 days | 30 days | $1,500 | 3% of invoice |
| 3% / 30 days | 60 days | $3,000 | 6% of invoice |
| 5% / 30 days | 45 days | $3,750 | 7.5% of invoice |
Notice how a slow-paying customer multiplies your cost. A 3% rate sounds cheap, but on a 60-day pay cycle the effective cost doubles to 6% of the invoice. Annualized, factoring is usually more expensive than a bank loan, which is the trade-off for speed and lenient qualification.
Read the contract before you sign
Some factoring agreements include long-term commitments, monthly minimum volumes, and notification clauses that tell your customers you are factoring. If you want customers kept in the dark, ask specifically about non-notification factoring and confirm it is offered.
Recourse vs. non-recourse: which factoring is right?
This is the single biggest structural choice, and it determines who eats the loss if your customer never pays.
| Feature | Recourse | Non-recourse |
|---|---|---|
| Who carries non-payment risk | You | The factor |
| Typical fee | Lower | Higher |
| What's covered | Nothing — you buy bad invoices back | Customer insolvency only (usually) |
| Best for | Reliable, creditworthy customers | Customer-concentration or higher-risk receivables |
Most factoring in the U.S. is recourse because it is cheaper. Non-recourse sounds safer, but read the fine print: it typically covers only the customer going insolvent during the term, not slow payment or a billing dispute. It is insurance against bankruptcy, not a blanket guarantee.
What are the pros and cons of invoice factoring?
Pros
- Cash in 24-48 hours once an invoice is verified
- Qualification based on customer credit, not yours
- No new debt added to your balance sheet
- Scales automatically as your sales grow
- Factor often handles collections, saving admin time
Cons
- More expensive than bank financing on an annualized basis
- Only works for B2B/B2G invoices, not consumer sales
- Customers may learn you are factoring (notification)
- Contracts can lock in minimums and long terms
- Recourse factoring leaves you holding unpaid invoices
When should you use factoring vs. another financing option?
Factoring shines when slow-paying customers — not weak demand — are choking your cash flow. But it is one tool among several. If you want a revolving cushion you tap on demand, a business line of credit may be cheaper. If you need a lump sum for a fixed project, compare a term loan. For equipment-heavy growth, look at equipment financing, and for general short-term gaps, working capital financing.
Two close cousins are worth knowing. Invoice factoring vs. a merchant cash advance: an MCA advances against future card sales and suits retail or restaurants, while factoring suits B2B sellers with invoices. And our dedicated invoice factoring product page covers advance rates and industries we work with.
Quick fit test
Factoring usually makes sense if: (1) you invoice other businesses, (2) your customers are creditworthy but slow, and (3) the cost of waiting — missed payroll, lost supplier discounts, stalled growth — exceeds the factoring fee.
To sanity-check whether a fixed-payment loan would be cheaper than factoring for your situation, model the numbers first.
Estimate your monthly payment
A representative estimate at 9%–36% APR. Actual rates and terms vary by business and product.
You can also run scenarios in our payment calculator before committing to any product.
How do you qualify for invoice factoring?
Because the factor is buying your receivables, underwriting centers on your invoices and your customers:
- Creditworthy commercial customers. The factor wants to know your customers reliably pay their bills.
- Verifiable, undisputed invoices. Work must be completed and the invoice free of liens or pre-existing claims.
- B2B or B2G sales. Factoring does not work for invoices billed to individual consumers.
- No conflicting liens. An existing UCC filing on your receivables (from another lender) may need to be subordinated or released.
Your personal credit and time in business matter far less here than for a traditional loan, which is why factoring is a go-to for fast-growing companies that have outrun their bank financing.
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