How invoice factoring works
A factor buys your invoices, advances most of the value now and pays the rest minus a fee when your customer pays.
Say you invoice a customer $20,000 on net-45 terms. A factor may advance a large share right away, then collect from your customer. When the customer pays, you receive the remainder less the factor's fee. Your customer typically pays the factor directly, so they usually know you use one.
ROI Funder does not place invoice factoring. We explain it here so you can compare it honestly. See our product page on invoice factoring.
How a line of credit works
You draw from a limit, pay interest on what you owe and keep customer relationships untouched.
A business line of credit is not tied to a specific invoice. You draw what you need, repay as cash arrives and draw again. Your customers never hear about it. Approval depends on your overall revenue, deposits and credit rather than the quality of one invoice.
Cost: a worked example
Factoring fees grow with the time an invoice stays open, while line interest grows with the balance you carry.
Illustrative example. $20,000 invoice, paid in 45 days.
| Option | Assumption | Approximate cost |
|---|---|---|
| Factoring | 3 percent fee per 30 days, charged on 45 days | About $900 |
| Line of credit | Draw $16,000 at 24 percent annualized for 45 days | About $475 |
Real pricing varies widely. Ask for every fee, including processing and minimums, and convert it into a dollar figure.
Who each one fits
Factoring suits businesses with big B2B invoices and thin credit. A line suits businesses with steady revenue and mixed needs.
Factoring can work for trucking, staffing, wholesale and contractors who bill large commercial customers on long terms, and whose own credit is weak. The approval hinges on your customers' creditworthiness.
A line suits owners who need cash for payroll, inventory and surprises, not just invoice gaps. It keeps working after one invoice is paid and does not involve your customers.
Control, customers and risk
Factoring puts a third party in touch with your customers, and recourse terms decide who bears the loss on unpaid invoices.
With recourse factoring, you must buy back invoices your customer does not pay. With non-recourse, the factor absorbs some of that risk, usually at a higher fee. Both can involve contracts with minimum volumes or long terms, so read them closely.
A line has covenants and renewal terms, but your customer relationships stay private and your invoices remain yours.
Which ROI Funder product comes closest
A business line of credit or working capital is the nearest fit, and neither requires selling invoices.
If you are looking at factoring because invoices pay slowly, a line of credit is the closest ROI Funder product. It typically funds in 24 to 72 hours. Working capital can work as a lump-sum bridge. Both lean on your bank deposits.
When is this not a fit? If your own revenue is under $20,000 a month or your business is under 6 months old, or if your customers are your only creditworthy asset, factoring may be the only structure that works. We would rather say so plainly.
How to decide
Decide from the size of the gap, how often it recurs and who your customers are.
- How large is the gap and how long does it last?
- Does it repeat every month?
- Would your customers accept a third party collecting?
- What is the full cost in dollars for each path?
For recurring invoice gaps, our guide to cash flow problems covers fixing the root cause, such as shorter payment terms or deposits upfront.
Questions to ask a factor
Fees, minimums and contract length matter more than the advance rate.
- What is the fee, and does it grow weekly?
- Are there processing, application or termination fees?
- Is there a minimum monthly volume?
- Is it recourse or non-recourse?
- Can I factor selected invoices or must I factor all?
The last question changes the economics a lot. Selecting only large, slow invoices keeps cost down.
Fixing the root of the invoice gap. Better terms can shrink the gap that you are paying to finance.
Ask customers for deposits, shorter terms, early-pay discounts or milestone billing. Send invoices the day work is complete. Our guide to handling invoice disputes helps when late payment comes from disagreements. Financing the gap is fine. Shrinking it is better.
When invoices are the real problem. If a few customers pay late every month, solve that before choosing any product.
Check your accounts receivable aging. If one or two customers account for most of the late money, a conversation or a change in terms may do more than any financing. Add a late fee, require a deposit or stop extending credit to chronic late payers. Financing is a bridge. It works best when the bridge leads somewhere, not when it repeats the same gap every month. If you decide to borrow anyway, a line gives you the flexibility to repay quickly once customers pay.
Frequently asked questions
Does ROI Funder offer invoice factoring?
No. ROI Funder does not place factoring or accounts receivable financing. A line of credit or working capital is the closest alternative.
Will my customers know I use a factor?
Often yes, because customers typically pay the factor directly. A line of credit does not involve your customers.
Is factoring cheaper than a line of credit?
Usually it costs more for the same period, though it can be easier to qualify for if your own credit is weak.
What is recourse factoring?
With recourse, you must repay the factor for invoices your customer fails to pay. Non-recourse shifts some of that risk to the factor, usually for a higher fee.