Invoice Factoring Explained: How to Turn Unpaid Invoices into Immediate Cash

Waiting 30, 60, or even 90 days for customers to pay invoices can strangle your cash flow, even when business is booming. Invoice factoring offers a solution: turn your unpaid invoices into immediate cash, typically within 24-48 hours.

This guide explains invoice factoring from start to finish: how it works, what it costs, the pros and cons, and how to determine if it makes sense for your situation.

What Is Invoice Factoring?

Invoice factoring is a financial transaction where a business sells its accounts receivable (invoices) to a third party (called a factor) at a discount. The factor advances you most of the invoice value immediately, then collects payment from your customer.

Understanding Factoring Costs

Factoring fees typically range from 1-5% per month, depending on invoice volume, customer creditworthiness, invoice size, industry, and payment terms.

Types of Factoring

Recourse Factoring: If your customer does not pay, you must buy back the invoice. Lower fees but higher risk.

Non-Recourse Factoring: Factor absorbs bad debt risk (with limitations). Higher fees but protection for you.

When Factoring Makes Sense

• Rapidly growing businesses needing cash to fund growth
• Seasonal businesses bridging cash flow gaps
• Startups that cannot qualify for traditional bank financing
• B2B companies with long payment terms from creditworthy customers

When to Avoid Factoring

• You can qualify for cheaper financing (lines of credit, SBA loans)
• Customers already pay quickly (net 15 or faster)
• Low profit margins that cannot absorb fees

Conclusion

Invoice factoring is a powerful tool for managing cash flow, but it comes at a cost. The key is understanding whether that cost is worth the benefit for your specific situation.

Use our Invoice Factoring Calculator to calculate exact costs for your invoices, then compare to alternative financing options.