Invoice factoring works in seven steps: (1) you deliver goods or services and issue a B2B invoice, (2) you submit the invoice to the factoring company with supporting documentation, (3) the factor verifies the invoice and your customer's creditworthiness, (4) the factor advances 70–90% of the invoice face value — typically within 24–48 hours, (5) your customer pays the factor directly at invoice due date, (6) the factor remits the reserve (the remaining 10–30%) to you minus the factoring fee, and (7) the factoring relationship continues on a per-invoice or ongoing facility basis.
Factoring requires that services or goods have already been delivered and accepted by your customer — you cannot factor a future invoice or a progress-billing installment for work not yet complete. The invoice must be a clean, undisputed receivable with a defined payment term (net 30, net 60, or net 90 are standard). Disputed or conditional invoices are generally ineligible unless the dispute is resolved. The customer must be a business entity — factoring is a B2B product; consumer receivables are subject to different regulations and most factors do not handle them.
You submit the invoice — along with a Notice of Assignment (NOA), which legally notifies your customer that the receivable has been sold to the factor and that payment must be made to the factor's lockbox — to the factoring company. Most factors use an online portal; invoice submission typically takes under 10 minutes per invoice batch. You'll also provide: a copy of the purchase order or contract, proof of delivery (signed BOL, delivery receipt, or completion certificate), and your customer's contact and payment information for verification.
The factor's credit team verifies: (1) that the invoice is valid, undisputed, and for work already delivered; (2) your customer's creditworthiness — factors underwrite against your customer's ability to pay, not your FICO score; and (3) that no competing lien or prior assignment exists on the receivable. Verification typically completes within 2–24 hours for established customers. New customers may take 1–3 days if the factor needs to run a credit pull or contact your customer directly. Factors will decline invoices for customers with poor payment history or known financial distress.
Once verification is complete, the factor wires or ACH-transfers the advance — typically 70–90% of the invoice face value — to your business bank account. Advance rates vary by: industry (trucking and staffing often see 90–95% advances; construction is lower due to lien risk), customer creditworthiness, and invoice aging. A $100,000 invoice at an 80% advance rate yields an $80,000 same-day deposit. The Federal Reserve's 2024 Small Business Credit Survey confirms that speed of funding is the primary driver of factoring adoption among small businesses — most respondents cited 1–3 day funding turnaround as the key benefit over traditional credit.
Your customer receives the Notice of Assignment and remits payment to the factor's lockbox — not to your business bank account — on the invoice due date. This is a critical operational point: your customer now has a new payee. For ongoing factoring relationships, your customers will be accustomed to remitting to the factor. Under FASB ASC 860, the factor's right to collect is a key element of the true-sale classification — without it, the transfer may be reclassified as a secured borrowing.
When your customer pays the factor, the factor releases the reserve — the remaining 10–30% of face value held back at Step 4 — to your account, minus the factoring fee. Factoring fees are typically structured as a discount rate per 30-day period the invoice is outstanding. On a $100,000 invoice outstanding for 45 days at 2% per month: fee = $100,000 × 2% × 1.5 = $3,000. Reserve payout: $100,000 × 20% reserve − $3,000 fee = $17,000 back to your account. You net $80,000 + $17,000 = $97,000 on a $100,000 invoice.
Factoring facilities are structured as either spot factoring (one invoice at a time, no commitment) or contract/ongoing factoring (a master facility agreement with minimum monthly volumes, dedicated account management, and lower rates). Contract factoring offers lower fees in exchange for volume commitments — typical terms include a minimum monthly factoring volume and a 12-month term. Spot factoring offers flexibility but higher per-invoice rates.
Day 0: You submit a $50,000 net-60 invoice from Customer ABC. Day 1: Factor verifies, advances 85% = $42,500. Day 60: Customer ABC pays factor $50,000. Day 61: Factor releases reserve: $50,000 × 15% = $7,500 − fee ($50,000 × 2.5% × 2 months = $2,500) = $5,000 back to you. Total received: $42,500 + $5,000 = $47,500. Effective cost: $2,500 on a $42,500 advance for 60 days ≈ 23.6% annualized.