The basic invoice factoring structure

Invoice factoring is commonly structured as the sale of unpaid business invoices to a factoring company at a discount, in exchange for immediate cash. Rather than borrowing against future receipts broadly, as with a merchant cash advance, factoring is tied to specific, already-issued invoices owed by your business customers.

The factoring company typically advances a percentage of the invoice value upfront, often in the range providers disclose individually, then collects payment directly or indirectly from your customer. Once the invoice is paid, the factoring company releases the remaining balance minus its fee. Because payment source and process vary by provider, request the specific mechanics in writing before comparing offers.

Numbers to identify before signing

  1. Advance rate: the percentage of the invoice value paid upfront, commonly a majority of the invoice but rarely the full amount.
  2. Factoring fee or discount rate: the fee charged, often expressed per week or per 30-day period the invoice remains unpaid.
  3. Reserve amount: the withheld balance released after your customer pays, minus fees.
  4. Minimum volume or contract term: some agreements require a minimum monthly factoring volume or a minimum contract length with early-termination costs.
  5. Total cost over the invoice's expected payment period: multiply the periodic fee by the realistic number of periods the invoice will likely remain outstanding, not the fastest-case scenario.
Simple example—not a quote: An $20,000 invoice with an 85% advance rate provides roughly $17,000 upfront. If the customer pays in 45 days and the fee is 1.5% per 15-day period, the total fee across three periods is roughly $900, released from the $3,000 reserve when the invoice is paid.

Recourse vs. non-recourse factoring

In recourse factoring, if your customer does not pay the invoice, your business is generally responsible for repaying the advanced amount to the factoring company. In non-recourse factoring, the factoring company typically absorbs some non-payment risk, but non-recourse agreements are usually more expensive and often exclude certain non-payment reasons, such as a payment dispute over delivered goods or services.

Do not assume "non-recourse" means zero risk. Read the specific exclusions closely, since most non-recourse agreements still hold your business responsible for non-payment caused by a dispute over the underlying goods or services rather than your customer's financial inability to pay.

When factoring is commonly considered

Factoring is more often considered by businesses that invoice other businesses or government entities on payment terms, such as net-30 or net-60, and need cash before that invoice is due. It is common in trucking, staffing, wholesale distribution, manufacturing and government contracting, where receivable timing is a normal part of the business model.

Factoring is generally less relevant for businesses that collect payment at the point of sale, such as most retail or restaurant operations, since there are no unpaid invoices to factor. Compare factoring fees against a business line of credit or a merchant cash advance for the same cash need, since each structure treats the underlying receivable differently.

Questions to ask a factoring company

  • Is this a recourse or non-recourse agreement, and what specific exclusions apply?
  • Does the company contact my customers directly, and how is that communication handled?
  • Is there a minimum monthly volume requirement or long-term contract commitment?
  • What happens if a customer disputes an invoice after it has been factored?
  • Are there additional fees beyond the factoring rate, such as origination, monthly minimum or termination fees?