Invoice factoring is the sale of outstanding business-to-business invoices to a factoring company for an immediate cash advance — typically 80-90% of face value up front, with the remainder (minus a discount fee) released once the customer pays. It is legally a sale of receivables, not a loan.
Factoring converts unpaid B2B invoices into cash today instead of waiting the 30, 45, or 90 days a customer's payment terms allow. The factor advances most of the invoice's face value up front, collects payment from the customer on the invoice's normal terms, and releases the held-back reserve — minus its discount fee — once that payment lands. Structurally it is a purchase of accounts receivable, not a loan, which is why it is priced with a discount rate rather than an APR and falls outside traditional lending disclosure rules (CFPB Regulation Z: https://www.consumerfinance.gov/rules-policy/regulations/1026/). Three mechanics define a facility: the advance rate (percentage of invoice face value paid up front, typically 80-90%), the discount rate (the factor's fee, usually quoted per 30-day period the invoice is outstanding — commonly 1-5% per 30 days), and the reserve (the held-back balance released once the customer pays in full). A factor also runs a UCC search before advancing on new receivables to confirm no conflicting lien already exists — UCC Article 9 governs the security-interest filings that let a factor perfect its claim on purchased receivables (Cornell Law UCC §9-502: https://www.law.cornell.edu/ucc/9/9-502). Recourse factoring — the more common, cheaper structure — requires the business to buy back an invoice the factor can't collect. Non-recourse factoring shifts a defined slice of that risk (typically customer insolvency or bankruptcy, not just late payment) to the factor, and costs more because the factor is pricing in real credit risk it can't push back. Most small-business factoring is also notification factoring: the customer is told to pay the factor directly, and the factor typically verifies the invoice before advancing. Underwriting weighs the paying customer's creditworthiness more than the applicant's own credit file, which makes factoring one of the few financing products genuinely available to younger businesses with thin credit history — as long as they have real B2B invoices from creditworthy commercial customers. The Federal Reserve's 2024 Small Business Credit Survey shows factoring and other receivables-based financing used by a meaningfully smaller share of small employer firms than lines of credit or credit cards, with usage concentrated in transportation, staffing, and wholesale trade — industries with structurally long B2B payment cycles (Fed SBC Survey 2024: https://www.fedsmallbusiness.org/survey/2024/2024-report-on-employer-firms).
No. Factoring is the sale of accounts receivable to a factoring company for an immediate cash advance — the same structural category as a merchant cash advance's receivables purchase. That's why it's priced with a discount rate rather than an APR.
Recourse factoring — the more common, cheaper structure — requires the business to buy back an invoice the factor can't collect. Non-recourse factoring shifts a defined slice of that risk (typically customer insolvency, not just late payment) to the factor, and costs more because the factor prices in real credit risk.
In most small-business factoring arrangements, yes — this is called notification factoring, and the customer is directed to pay the factor directly. Non-notification (confidential) factoring exists but is rarer and typically reserved for larger, more established AR books.
Factoring is the sale of the invoice — the factor owns it and typically collects payment directly from the customer. Invoice financing (asset-based lending against AR) uses the invoices as collateral for an advance while the business retains ownership and keeps collecting from customers itself.
Factoring is one of the least credit-score-driven financing products available — underwriting centers on the paying customers' creditworthiness and payment history, not primarily the applicant's own credit. A thin or short personal credit file rarely disqualifies a factoring application on its own.