How Invoice Factoring Works
Turn unpaid invoices into immediate cash. A complete guide to invoice factoring for SMEs.
Invoice factoring lets you sell your outstanding invoices to a lender at a small discount in exchange for immediate cash. Instead of waiting 30, 60, or 90 days for clients to pay, you get the funds you need today to keep operations running.
The Basics of Invoice Factoring
When you factor an invoice, a lender (the factor) advances you 70–90% of the invoice value upfront. Once your client pays the invoice in full, the factor releases the remaining balance minus a small fee — typically 1–5% of the invoice value.
Factoring vs. Invoice Financing
Invoice factoring involves selling the invoice outright — the factor takes over collections. Invoice financing (or discounting) uses the invoice as collateral for a loan, and you remain responsible for collecting payment. Factoring is simpler and faster; financing keeps the client relationship in your hands.
Who Is It Best For?
Invoice factoring works best for B2B businesses with creditworthy clients but slow payment cycles — staffing agencies, trucking companies, manufacturers, wholesalers, and service contractors are common users. Your clients' credit matters more than your own.
Costs and Fees
Factoring fees vary by industry, invoice volume, and client creditworthiness. Typical rates range from 1% to 5% per 30-day period. Some factors charge additional fees for due diligence, wire transfers, or monthly minimums — always review the full fee schedule before signing.
How to Get Started
To qualify, you generally need at least 6 months in business, outstanding invoices from creditworthy commercial clients, and no tax liens or unresolved legal judgments. The application process is straightforward — most approvals happen within 24–72 hours.
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