Invoice Factoring: How It Works, What It Costs (2026)
Invoice factoring sells your unpaid invoices at a discount so you get cash now instead of in 30 to 90 days. The mechanics are simple. The pricing is where operators get hurt.
Factoring is the oldest form of business finance still in wide use, and the most consistently mis-sold. The advertised rate is almost never the number you end up paying, because the rate is only one of five variables in the total cost. This guide covers all five.
How invoice factoring works
You deliver goods or services and issue an invoice. Instead of waiting for the customer to pay, you sell that invoice to a factoring company. They advance you most of the face value immediately, collect from your customer, then release the remainder minus their fee.
- You invoice your customer as normal. Nothing changes on their side except where they send payment.
- You submit the invoice to the factor. Usually with proof of delivery — a signed BOL, a timesheet, a completed work order.
- The factor advances you a percentage. Typically most of the invoice, same day or next day.
- Your customer pays the factor directly. This is called a notice of assignment and it is not optional in most agreements.
- The factor releases the reserve. The held-back remainder, minus the discount fee and any add-ons.
What it actually costs
Five variables decide your real cost. Comparing factors on the first one alone is how people end up paying double what they expected.
- The discount rate. The headline number. Often quoted per 30 days, sometimes per 15, which doubles it.
- The advance rate. How much you get up front. The rest is held in reserve until your customer pays.
- Recourse or non-recourse. Who eats the loss if the customer never pays. Non-recourse costs more and covers less than most people assume.
- Add-on fees. ACH or wire fees, application fees, monthly minimums, credit-check fees, lockbox fees, same-day funding surcharges.
- The contract. Term length, monthly volume minimums, termination notice, and the buyout cost if you leave early.
Two factors quoting the same headline rate can differ by several points of real cost once the other four variables are in. See the full fee anatomy →
Why some numbers on this site are blank
Every other factoring comparison site fills its rate columns. Most of those numbers are the advertised teaser rate, republished without checking what a real small operator is quoted. We publish a figure only when we have a primary source: the company's own published page, or a quote we obtained ourselves. Where we do not have one, the cell says Not published. That gap is honest and it closes edition by edition.
Who factoring actually suits
Factoring is priced off your customers' credit, not yours. That makes it available when a bank loan is not — to new businesses, to companies with thin credit files, to operators who have been declined elsewhere. It suits you if you invoice commercial customers on terms, your margins absorb the fee, and the cash gap is the thing constraining growth.
It suits you badly if you sell to consumers, if your margins are already thin, or if the underlying problem is pricing rather than timing. Factoring fixes a timing gap. It does not fix an unprofitable business, and using it to do so is expensive.
The main varieties
- Whole-ledger factoring — you commit all invoices. Cheapest per invoice, least flexible.
- Spot or single-invoice factoring — you pick which invoices to sell. More expensive, no lock-in.
- Freight factoring — built for carriers, usually bundled with fuel cards and broker credit checks.
- AR factoring — the same product under the term larger firms use.
- Invoice financing — a loan secured against invoices. You keep collections. Different product, often confused.
Where to go next
- Invoice factoring companies compared — the full index
- The Rate Index — advertised rate against what operators report paying
- Cost calculator — what a given rate and advance really nets you
- Small business factoring — low-volume and no-minimum options