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What Is Invoice Factoring?

Joe Schwartz

Joe Schwartz

Business Loans Editor |

Find out how to secure money with invoice factoring image

Is your business in need of some immediate capital? If so, you might want to explore invoice factoring.

Invoice factoring, also referred to as accounts receivable factoring, describes a form of asset-based lending (ABL) that uses a business’ accounts receivable as collateral. With invoice factoring, a business converts accounts receivable (invoices) due within the last 90 days into immediate cash by selling them to a third party (called a factor).

Invoice Factoring At A Glance:

- Borrow $100-$100,000 per month

- 2-7 business days to apply

- 1-3 business days to receive funding

- Invoices must be payable within 90 days and free of liens

- Advance invoices by 80%-90%

- Pay fees to the factor (as low as 0.5% of the invoice, depending on the factor)

How Does Invoice Factoring Work?

Step 1: Your business invoices a client with payment terms of 30-90 days.

Once you have provided the product or service to your customer, issue an invoice that requires payment within the next 90 days.

Step 2: Next, your business will sell the invoice to a factor.

You will need to find a factor, submit an application, and sell the invoice. To apply, you will need to provide personal and business information, accounts receivable aging report, accounts payable aging report, tax returns, and corporate paperwork.

During the application process, the factor will assess whether your business qualifies. Usually, the factor will accept a company that has been in business for at least 2 years and doesn’t have any serious legal or tax problems. If approved, you will sign an agreement with the factor to establish the initial borrowed amount. The factor will determine the advance based on the size of the transaction, your industry, and other risk parameters.

Step 3: The factor advances a percentage of the invoice.

Next, the factor will advance a percentage of the factored invoice, generally around 80%. The factor may also send a “notice of assignment” to the client who will pay the invoice.

Step 4: The invoice is due

Once the invoice is due, the client will pay the factor rather than paying your business.

Step 5: The factor transfers the remaining 20% of the invoice to your business, minus fees.

After the client has paid the factor, the factor will send the rest of the remaining invoice amount, known as the reserve amount. They will subtract any fees, sometimes as low as 0.5% of the total invoice, depending on the factor.

Benefits of Invoice Factoring

To get quick cash: Invoice factoring provides an easy and immediate cash source to cover expenses. Other financing options can take as long as 30, 60, 90 days, or more to complete.

Avoids more debt: Invoice factoring gives businesses the option to get extra funding without having to take out more debt.

Less of a credit risk: Invoice factoring has less of a credit risk than other business financing options. It relies on the creditworthiness of the customer, not your own business. Even businesses that don’t have the best credit can still qualify.


Invoice factoring helps businesses secure money quickly by selling unpaid customer invoices to cover expenses. As long as the customer pays the invoice on time, factoring represents a more affordable short term financing option than other alternatives.

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