You finished the job, sent the invoice, and your customer pays in 45 days. Payroll is due Friday. Plenty of well-run companies carry that gap every week: staffing agencies, freight carriers, wholesalers, manufacturers and contractors who sell to other businesses on payment terms.

Invoice factoring and invoice financing both turn money you’re already owed into cash you can use now. They’re built differently, and the differences show up in who collects from your customer, what you pay, and how much of the arrangement your customers see.

The short version

  • Invoice factoring: you sell your unpaid invoices to a factoring company. It pays you most of each invoice now, collects from your customer, then sends you the rest minus its fee.
  • Invoice financing: you borrow against your unpaid invoices. You keep collecting from your customers, and you repay the lender as they pay you.

Lenders don’t always use the two names the same way, and both get called accounts receivable financing. The question that settles it is who owns the invoice. If the lender buys it and collects it, you’re looking at factoring.

How invoice factoring works

  1. You do the work and invoice your customer on your usual terms.
  2. You send a copy of the invoice to the factoring company, which confirms it with your customer.
  3. The factor advances a share of the invoice, commonly 70% to 90%. Once your account is set up, that money can arrive within a day or two of each invoice.
  4. Your customer pays the factor directly, on the original terms.
  5. The factor sends you the rest, called the reserve, minus its fee.

Your customer receives a notice telling it where to send payment. In trucking and staffing, where factoring is common, most customers have seen one before.

For example, a staffing agency places nurses at a regional hospital that pays on 60-day terms, while the agency pays its nurses every week. By factoring each week’s invoices, the agency meets payroll from work it has already billed. It can also take on a second hospital without waiting two months for the first one’s payments to come around.

How invoice financing works

With invoice financing, your invoices are the security and the customer relationship stays with you. A lender advances money against invoices you’ve sent, or opens a credit line sized to what your customers owe you. Customers pay you as usual, and you repay the lender as that money comes in.

Because the lender isn’t collecting, it leans more on your business itself: your deposits, your time in business, your bookkeeping and how reliably your customers pay. Your customers usually aren’t told. For an owner with a few large, long-standing accounts, that privacy can be the deciding factor.

What it costs

Factoring is usually priced as a fee on each invoice, and many factors charge it for each week or month the invoice stays unpaid. That makes your customers’ payment habits part of your cost. An invoice paid in 30 days costs less to factor than the same invoice paid in 75.

Read past the headline fee. Some agreements add a setup fee, a charge per invoice, transfer fees, a monthly minimum volume, or a fee to end the contract early. Invoice financing is usually priced like a credit line, with interest or a fee on what you’ve drawn plus any account fees.

Compare offers in dollars. Take one typical invoice to each lender. Ask what you’d receive on day one, what you’d receive in total, and what it would cost if your customer paid on time, then a month late.

Recourse and non-recourse factoring

With recourse factoring, if your customer doesn’t pay, you buy the invoice back or replace it with another. Most factoring is written this way, and it costs less.

With non-recourse factoring, the factor absorbs the loss if your customer can’t pay. Read the definition closely, because it usually covers a customer that becomes insolvent and rarely covers an invoice your customer disputes. Non-recourse costs more, and the factor is choosier about which customers it accepts.

What a lender looks at

Your customers’ credit counts more than yours here, because the factoring company is counting on them to pay. That’s why a young company with large, reliable customers can often qualify for factoring sooner than it would for a term loan.

Beyond that, most factoring companies look for:

  • Invoices for work that’s finished and accepted, rather than deposits or work in progress
  • Customers that are businesses or government agencies
  • No other lender with a claim on your receivables, or an agreement that lets the factor go first
  • A spread of customers, since one customer making up most of your invoices adds risk

That third point is worth checking first. If a bank or another lender already has a lien on all your business assets, the factor usually needs that lender’s agreement. The lender either releases your receivables or lets the factor go first on them. Find out early, because sorting it out can add time to setup.

Which one fits

Factoring tends to fit when:

  • Your customers are larger than you and pay on terms of 30 to 90 days
  • You’re growing quickly and every new invoice needs funding
  • You’d rather hand off collections and spend the time on the work
  • Your business is young, but your customers are established

Invoice financing tends to fit when:

  • You want to keep collections and customer contact in-house
  • Your books are clean and the business has a few years of history
  • You need extra cash in some months, rather than on every invoice

Neither fits well when customers pay at the counter or invoices are often disputed. Construction billing, with retainage and approvals further up the chain, can work with a lender that knows it; see managing construction cash flow.

Questions to ask before you sign

  1. What share of each invoice is advanced, and when is the reserve released?
  2. Is the fee charged once, or for each week or month an invoice is open?
  3. Is it recourse or non-recourse, and what exactly does non-recourse cover?
  4. Do I have to factor every invoice, or can I choose which ones?
  5. Is there a minimum volume, a contract term or a fee to leave?
  6. What are my customers told, and by whom?

Put your invoices to work

If your customers pay on terms, start with invoice financing. If you haul freight, see financing for trucking companies. When you’re ready, apply from the invoice financing page. Applying takes a few minutes and won’t affect your credit score. We’ll review your application and match you with the options that fit.