Invoice Factoring: Selling Unpaid Invoices for Cash Now

How a factoring deal works step by step

You invoice a customer, sell that invoice to a factor, receive an advance on its value, and get the remainder minus fees when the customer pays the factor.

1. You deliver work and invoice your customer on normal terms, such as net 30 or net 60.
2. You submit the invoice to the factoring company.
3. The factor verifies the invoice and advances a portion of its face value, holding back a reserve.
4. Your customer pays the factor directly.
5. The factor releases the reserve to you, minus its fee.

Because the factor collects, your customer will usually know you are factoring. Some owners are fine with that; others worry about how it looks. Our guide to understanding invoice factoring goes deeper on contract terms.

Recourse vs. non-recourse factoring

With recourse factoring you must buy back invoices your customer fails to pay. Non-recourse shifts some of that risk to the factor and usually costs more.

Read the recourse terms closely. In a recourse agreement, if your customer never pays, you owe the advance back. In a non-recourse agreement, the factor absorbs losses from certain defined events, often customer insolvency, but not disputes over the work itself.

Other terms to check include minimum monthly volume, whether you must factor all invoices or can choose (see single invoice factoring), termination fees and how long the contract runs.

What invoice factoring costs

Factors charge a discount fee that often grows the longer the invoice stays unpaid, plus possible service, setup or minimum-volume fees.

Fee structures vary widely. Many factors charge a percentage of the invoice for a set period, then add more for each additional period the invoice stays open. That means a customer who pays slowly makes the money more expensive.

Illustrative example: you factor a $20,000 invoice. The factor advances most of it right away and charges a fee that totals $800 if the customer pays in 30 days, but $1,600 if they take 60. On an annualized basis, that cost can be significant, so convert it to a monthly figure and compare it against other options before committing.

Who factoring fits

Factoring fits B2B businesses with creditworthy commercial or government customers who pay on long terms, especially when the owner's credit or history is thin.

Because the factor is really underwriting your customer's ability to pay, factoring can work for younger businesses or owners with weaker credit, as long as the customers are solid. Common users include staffing firms, distributors, manufacturers and some service contractors.

It does not fit businesses that sell to consumers, get paid at the point of sale, or have invoices tied up in disputes or retainage. Some industries, like construction and medical billing, have specialized factors with their own rules.

The closest ROI Funder alternatives

If the goal is cash flow while customers pay slowly, working capital, revenue-based financing or a line of credit can bridge the gap without selling invoices.

• Business line of credit: draw when an invoice goes out, repay when it is paid. Your customers are not involved. Funds in 24-72 hours.
• Working capital: a lump sum for a large order or payroll gap, funded the same business day on approved, complete files.
• Revenue-based financing: repayment flexes with your deposits, which can help when customer payments arrive unevenly.

These are underwritten on your business, not your customers. ROI Funder looks for 6+ months in business, $20,000+ in monthly revenue and 500+ FICO.

Questions to ask a factoring company

Ask how fees are calculated over time, whether the agreement is recourse, what minimums and term apply, and how they communicate with your customers.

• How is the fee calculated, and how does it change if a customer pays late?
• What portion is advanced, and when is the reserve released?
• Is it recourse or non-recourse, and what events does non-recourse actually cover?
• Do I have to factor all invoices, or only the ones I choose?
• Is there a monthly minimum or a long contract with exit fees?
• How will you contact my customers, and in whose name?

Get the answers in writing. Then convert the total cost on a typical invoice into a monthly figure so you can compare it fairly with a line of credit or working capital.

When the alternatives are not a fit

If your business is under 6 months old, has thin revenue or weak credit but sells to strong commercial customers, factoring may be the better tool.

A line of credit or working capital depends on your own deposits and credit. If those do not meet ROI Funder's minimums, a factor that leans on your customers' credit may approve you when a cash flow lender will not. Factoring can also scale automatically with sales, since every new invoice becomes new borrowing capacity.

Compare both side by side in line of credit vs. invoice financing.