What is invoice factoring?

Invoice factoring is a working-capital financing method where a business sells its outstanding invoices to a factoring company for an immediate cash advance — typically 70-90% of the invoice face value. The factor collects payment from the customer directly. The remaining balance, minus a factoring fee (1-5% per 30 days), is paid to the business when the customer settles the invoice.

How invoice factoring works

The mechanics in five steps:

Your business invoices a commercial customer for goods or services delivered.
Instead of waiting 30-90 days for the customer to pay, you sell the invoice to a factoring company.
The factor advances you 70-90% of the invoice face value within 1-3 business days.
Your customer pays the factor directly when the invoice comes due.
The factor remits the remaining balance (10-30%) to you, minus the factoring fee (typically 1-5% per 30 days the invoice was outstanding).

What it costs

Factoring fees are typically structured as a percentage of invoice face value per 30-day period the invoice is outstanding. Typical ranges: 1% per 30 days for premium customers + low-risk industries; 3-5% per 30 days for higher-risk customers or longer payment cycles. The effective annualized cost compounds quickly on slow-paying invoices — a 3% fee on a customer that pays in 60 days = 6% off the invoice = ~36% effective APR.

Who qualifies

Factoring underwriting flips the usual credit script: the factor evaluates your customer's creditworthiness, not yours. Typical requirements:

B2B (business-to-business) invoices only — consumer receivables typically ineligible
Creditworthy commercial customers (the factor will run credit on your top customers)
Clean accounts receivable — no existing liens on AR (UCC-1 search)
Invoices for goods or services already delivered, not progress billings
No minimum owner FICO at most factors — 500+ accepted, sometimes lower

When invoice factoring fits

Factoring shines in B2B businesses with: (a) slow-paying commercial customers (30-90 day cycles), (b) growth outpacing cash flow, (c) AR concentrated in creditworthy enterprises, (d) thin owner credit that blocks bank financing. Common verticals: trucking, staffing, manufacturing, wholesale distribution, professional services with enterprise customers. Per the Federal Reserve Small Business Credit Survey, factoring approval rates are roughly 2x bank-loan approval rates for sub-680 FICO applicants.

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Authoritative sources

Federal Reserve SBC Survey 2024 confirms factoring as a distinct application path within SMB financing — used disproportionately by trucking, manufacturing, and wholesale distribution verticals. — Fed SBC Survey 2024
FASB ASC 860 establishes the accounting standards for when factoring qualifies as a true sale (vs. secured borrowing) — the basis for off-balance-sheet treatment. — FASB ASC 860
SBA International Trade Loans and CAPLines programs both include factoring-style structures within their 7(a) guaranteed lending products. — SBA.gov

Key takeaways

Invoice factoring converts unpaid B2B invoices into immediate cash within 1-3 business days.
Advance rate: 70-90% of invoice face value; remainder paid (minus fee) when customer settles.
Pricing: 1-5% factoring fee per 30 days the invoice is outstanding.
Underwriting: customer creditworthiness, not the business owner's FICO. No FICO floor at most factors.
Best fit: B2B businesses with slow-paying creditworthy customers and clean AR. Common in trucking, staffing, manufacturing.
Related: Invoice Financing vs Invoice Factoring — Detailed Comparison | Trucking business loan options | Trucking toolkit — financing for owner-operators and fleets