Invoice Factoring Complete Guide: How It Works & Who It Is For (2026)

How Invoice Factoring Works

You sell your outstanding invoices to a factoring company at a discount. The factor advances you 80–90% of the invoice value immediately, then collects payment directly from your customers. Once collected, the factor sends you the remaining balance minus their fee. The factor is essentially lending against your customers credit, not yours — which makes this product highly accessible for businesses with weak credit but strong B2B clients.

Recourse vs. Non-Recourse Factoring

With recourse factoring, you are responsible for buying back invoices that your customer does not pay. This is the more common and less expensive option. Non-recourse factoring shifts the credit risk of customer non-payment to the factor — they absorb the loss if a customer defaults. Non-recourse factoring costs more but provides genuine protection against bad debt, which matters in industries with high customer concentration risk.

Understanding Factoring Costs

Factoring fees (called discount rates) typically range from 1–5% per 30-day period the invoice remains outstanding. On a $100,000 invoice with a 2% monthly rate, you pay $2,000 per month until your customer pays. If they pay in 45 days, you pay approximately $3,000. Translated to APR, factoring can be expensive — but compared to the cost of waiting 60–90 days for payment or taking an MCA, it can be the right choice for B2B businesses with reliable clients.

Frequently asked questions

Will my customers know I am using invoice factoring?

In most factoring arrangements, yes — customers are notified to remit payment to the factor rather than to you directly.

Is invoice factoring a loan?

No — factoring is a sale of receivables, not a loan, so it does not add debt to your balance sheet.