TL;DR

Invoice factoring lets you get paid now for invoices that won't be due for weeks or months. You sell the invoice to a factoring company who advances 70–90% upfront — they collect from your client and keep a fee.

Key Points

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The factoring company typically advances 70–90% of the invoice value immediately, with the remainder (minus their fee) paid after collection

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Unlike a loan, factoring is not debt — you're selling an asset (the receivable) rather than borrowing against it

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Factor fees typically range from 1–5% of the invoice value, depending on the client's creditworthiness and invoice age

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Best suited for businesses with reliable B2B clients who pay slowly rather than businesses with risky or consumer clients

How Invoice Factoring Works

When you factor an invoice, you sell your right to collect payment to a factoring company¹. Here's the typical flow: you complete work and issue an Invoice to your client. Instead of waiting 30–90 days for payment, you submit that invoice to the factoring company. They advance you 75–90% of the face value within 24–48 hours. When your client pays the factor on the due date, the factor sends you the remaining balance minus their fee. The fee reflects their risk and the time value of money — effectively the cost of early access to your cash.

Factoring vs. Invoice Financing

Invoice factoring and Invoice Financing are often confused but work differently. With factoring, you sell the invoice outright — the factor takes over collections and your client pays them directly. With invoice financing (also called accounts receivable financing), you borrow against the invoice as collateral but remain responsible for collecting payment from your client. Factoring is simpler but means giving up control of your client relationship; financing keeps you in control but is technically debt on your books.

When to Consider Factoring

Invoice factoring makes sense if you have reliable B2B clients with slow payment terms (like Net 60 or Net 90) and you need Working Capital to cover payroll, materials, or operating costs before those invoices pay. It's especially common in industries like staffing, trucking, and construction where long payment cycles are standard. The cost — typically 1–5% per invoice — should be weighed against the business impact of the Cash Flow gap. For many small businesses, this cost is justified by the ability to take on new work without running out of operating cash.

References

FreshBooks — What Is Invoice Factoring? A Complete Guide ↗

freshbooks.com

FreshBooks — Working Capital: What It Is and How to Get It ↗

freshbooks.com

Last updated: June 9, 2026

Related Terms

Invoice Financing

A form of short-term borrowing where a business uses unpaid invoices as collateral to receive immediate cash from a lender, repaying the advance plus fees when the client pays.

Accounts Receivable

Money owed to a business by its customers for goods or services that have been delivered but not yet paid for.

Cash Flow

The net movement of money into and out of a business over a specific period, reflecting the actual cash received from clients and paid to vendors, suppliers, and operating expenses.

Working Capital

The difference between a business's current assets (cash, receivables, inventory) and current liabilities (accounts payable, short-term debt) — a measure of short-term financial health and operational liquidity.

Net 60

A payment term indicating that the full invoice amount is due within 60 calendar days from the invoice date.

Net 90

A payment term indicating that the full invoice amount is due within 90 calendar days from the invoice date.

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