You did the work and sent the bill, and now your customer has 60 days to pay. Invoice factoring lets you sell those unpaid invoices to a factoring company for cash now. For businesses that sell to other businesses, it can be one of the most accessible forms of financing around, because the factor cares most about whether your customer is good for the money.
Can it happen in 24 hours? That depends on one thing above all: whether you’ve already opened an account. First-time setup usually takes several days, although some factors can complete it faster for simple files. Once you’re approved, funding on new invoices can often occur within a business day.
The language of factoring can confuse newcomers, and misunderstanding it can get expensive. This guide is built around the vocabulary you’ll meet in the order you’ll meet it.
The Vocabulary of Getting Started
Account debtor. Your customer, the party that owes the invoice. Factors assess this company’s payment reliability closely. An invoice owed by a large, creditworthy company is much more attractive than one owed by a shaky startup.
Client. That’s you, in the factor’s language.
Application and due diligence. Before buying anything, the factor checks your business and your customers. Have these ready:
• Accounts receivable aging report
• Customer list with contact details
• Sample invoices with proof of delivery or completed work
• Business formation documents and owner IDs
• Bank statements and tax status
• Any existing loan agreements
UCC search and lien position. The factor searches public filings for existing claims on your receivables. This is one of the most common obstacles. If a bank or cash advance company holds a blanket lien, the factor will generally need it released or subordinated.
UCC-1 filing. The factor records its own interest in your receivables, which notifies other creditors.
Time-saver: Run through your existing financing agreements today. If you have a lien on receivables, call that creditor now. A payoff letter or subordination agreement is often what turns a one-day timeline into a two-week one.
The Vocabulary of Pricing
Advance rate. The percentage of the invoice you receive up front, commonly in the range of 70% to 90% or more, depending on the industry and customer quality.
Reserve. The portion held back until the customer pays.
Factoring fee or discount rate. The factor’s charge, commonly about 1% to 5% per 30 days the invoice is outstanding. It may apply to the full face value of the invoice, not just to the amount advanced.
Tiered pricing. A rate that rises the longer your customer takes to pay.
Additional fees. Possible charges for application, wire transfer, credit checks, invoice processing, minimum monthly volume, and early termination.
Here’s a worked example:
|
Item |
Amount |
|---|---|
|
Invoice face value |
$40,000 |
|
Advance at 85% |
$34,000 |
|
Reserve held |
$6,000 |
|
Fee at 3% for 45 days (tiered to 4.5%) |
$1,800 |
|
Reserve released after payment |
$4,200 |
|
Total you receive |
$38,200 |
Because the $1,800 fee is measured against about $34,000 of real cash for only 45 days, the annualized cost is around 43%. Factoring is priced for convenience and access, so compare it with a line of credit if you qualify for one. This overview of no-collateral working capital loans can show you what else is available.
The Vocabulary of the Contract
Recourse factoring. If your customer doesn’t pay within a defined period, you need to buy back the invoice or replace it. This is the most common form, and often the cheaper one.
Non-recourse factoring. The factor absorbs certain losses, usually only when the customer becomes insolvent. A customer who simply refuses to pay because of a dispute is typically not covered. Always read the precise definition.
Spot factoring. Selling individual invoices without an ongoing commitment. Flexible but generally pricier.
Whole-ledger factoring. Selling all or most of your receivables under a longer contract, which typically offers better pricing but less freedom.
Minimum volume and term. Commitments that can result in charges when you don’t factor as much as promised. A one-year agreement with auto-renewal can be costly to leave if you miss the notice window. A product overview such as Fundivi receivables factoring gives one example of what’s on offer.
The Vocabulary of Daily Operation
Notice of assignment. A letter directing your customer to pay the factor. Consider how your customer will react, and introduce the arrangement yourself, in positive terms, before the letter arrives.
Verification. The factor confirms an invoice is valid, often by contacting your customer. Slow verification is a major reason a same-day schedule slips.
Lockbox. A controlled account where customer payments are received.
Concentration limit. A cap on how much of your funding can come from one customer. Businesses dependent on a single large client should raise this question early.
Chargeback. The factor’s reversal of an unpaid or disputed invoice under a recourse agreement.
Turning the Vocabulary Into a Timeline
Setting up in advance, before the crunch, is what makes one-day funding possible. A practical sequence:
1. Today: Pull your aging report and check for liens.
2. This week: Open an account with a factor, even if you don’t need funds yet.
3. When you invoice: Submit the invoice with proof of delivery promptly.
4. Same day: Ask your customer’s accounts payable contact to answer verification requests quickly.
5. Next business day: Advance arrives, often through ACH or wire transfer.
If you need to shop for a factor, pay close attention to contract length and fee structure. Directories like the BestMCALoans.com funding reference can suggest ways to compare factoring with advance-based funding.
When Factoring Isn’t the Right Fit
Consider something else if your invoices are frequently disputed, if your sales are direct to consumers, or if your margins are so thin that a 3% to 5% monthly fee would eliminate your profit. Construction work involving progress billing and retainage can also be difficult to factor. And if your customers routinely pay in less than 15 days, the cost of an account may outweigh the benefit.
The Vocabulary of Invoice Quality
Eligible invoice. An invoice the factor will buy. Generally, it must be for goods delivered or services already finished, owed by a business or government customer, and free of disputes or offsets.
Aged invoice. One that’s been outstanding for too long, often beyond 90 days. Factors commonly refuse these, so older balances may not count toward your funding.
Progress billing. Invoicing for work that’s only partly complete. Since the customer may refuse payment until the job is done, many factors won’t buy these invoices.
Offset or contra account. A situation in which your customer also sells to you and can subtract what you owe from what it pays. Factors watch for this, as it reduces the amount they will collect.
Proof of delivery. A signed delivery receipt, timesheet, or acceptance email. Including it with the invoice is among the simplest ways to speed up verification and reach same-day or next-day funding.
Before submitting anything, sort your aging report by these definitions. You may find that a $200,000 receivables balance contains only $130,000 of eligible invoices, and it’s far better to plan around the real figure from the start. If most customers pay by card instead, you might review Benzinga’s report on merchant card-sales funding.
Frequently Asked Questions
Does my credit score matter?
Less than with most financing. Factors focus on your customers’ credit, although they’ll still review your background, liens, and tax issues.
Will my customers find out?
In notification factoring, yes. Non-notification arrangements exist but are less common and usually limited to stronger businesses.
Is factoring a loan?
True factoring is a sale of receivables, not a loan, though the legal treatment depends on the agreement’s terms. Ask your attorney or accountant if the distinction matters.
Can a new business factor invoices?
Often, yes, since customer credit carries so much weight. You’ll still need valid invoices for completed work.
How fast is funding after setup?
Often within one business day of submission and verification, assuming clean invoices and a responsive customer.
What happens if a customer pays late?
Your fee can increase under tiered pricing. In recourse arrangements, you may eventually have to repurchase the invoice.
Can I choose which invoices to factor?
With spot factoring, yes. Whole-ledger contracts commonly require you to submit most or all of your receivables, so ask about this before signing.
Is there a minimum invoice size?
Some factors set minimums per invoice or per month. Smaller invoices can also carry proportionally higher processing costs, so include those fees in your comparison.
Disclaimer: This content is for informational purposes only and is not intended as financial advice, nor does it replace professional financial advice, investment advice, or any other type of advice. You should seek the advice of a qualified financial advisor or other professional before making any financial decisions.
