Invoice Factoring Explained: Pros, Cons & Best Companies 2025

What is Invoice Factoring?

Invoice factoring (also called accounts receivable factoring) is when you sell your unpaid invoices to a third-party company (the "factor") for immediate cash. Instead of waiting 30-90 days for clients to pay, you get money within 24-48 hours.

How Invoice Factoring Works

Step 1: You complete work and invoice your client
Step 2: You sell the invoice to a factoring company
Step 3: Factor advances you 70-90% of invoice value immediately
Step 4: Your client pays the factor directly
Step 5: Factor pays you the remaining balance minus their fee

Example Transaction

Invoice amount: $10,000
Advance rate: 85%
Factoring fee: 3%

You receive immediately: $8,500 (85%)
Factor collects from client: $10,000
Factor's fee: $300 (3%)
You receive later: $1,200 (remaining 12%)
Your total: $9,700

Types of Invoice Factoring

Recourse Factoring

Definition: You're responsible if client doesn't pay
Cost: Lower fees (1-3%)
Risk: Higher (you may have to buy back unpaid invoices)
Best for: Established clients with good payment history

Non-Recourse Factoring

Definition: Factor assumes risk of non-payment
Cost: Higher fees (3-5%)
Risk: Lower (factor absorbs losses)
Best for: New or risky clients

Spot Factoring

Definition: Factor individual invoices as needed
Cost: Higher per-invoice fees
Flexibility: High (no long-term commitment)
Best for: Occasional cash flow needs

Contract Factoring

Definition: Ongoing agreement to factor all invoices
Cost: Lower fees (volume discount)
Commitment: Typically 6-12 months
Best for: Regular cash flow needs

Invoice Factoring vs Invoice Financing

Feature	Factoring	Financing
Ownership	You sell invoice	You keep invoice
Collections	Factor collects	You collect
Client knows	Yes	No
Cost	% of invoice	Interest rate
Credit check	Client's credit	Your credit

Pros of Invoice Factoring

• Fast cash: Money in 24-48 hours
• No debt: Not a loan, doesn't affect credit
• Easy approval: Based on client's credit, not yours
• Outsourced collections: Factor handles payment collection
• Flexible: Grows with your business
• No collateral: Invoices are the collateral

Cons of Invoice Factoring

• Expensive: Costs more than traditional financing
• Client relationships: Factor contacts your clients
• Not all invoices qualify: Need creditworthy clients
• Fees add up: Especially for slow-paying clients
• Contracts: May have minimums or commitments
• Perceived weakness: Clients may think you're struggling

How Much Does Invoice Factoring Cost?

Factoring Fees

Typically 1-5% of invoice value, depending on:

• Invoice volume: Higher volume = lower rates
• Client creditworthiness: Better clients = lower rates
• Invoice age: Older invoices = higher rates
• Industry: Some industries cost more
• Recourse vs non-recourse: Non-recourse costs more

Additional Fees to Watch For

• Application fee: $0-$500
• Due diligence fee: $0-$1,000
• Monthly minimum: $500-$2,000
• Wire transfer fees: $10-$30 per transfer
• Early termination fee: Varies widely

Best Invoice Factoring Companies 2025

1. Fundbox

Best for: Small businesses, easy approval
Advance rate: Up to 100%
Fees: 4.66-8.99% for 12 weeks
Minimum: None
Pros: Fast approval, user-friendly, no hidden fees
Cons: Higher rates than competitors

2. BlueVine

Best for: B2B companies
Advance rate: Up to 90%
Fees: 0.25-1% per week
Minimum: $25,000/month
Pros: Competitive rates, good technology
Cons: Higher minimums

3. Triumph Business Capital

Best for: Transportation, staffing
Advance rate: Up to 95%
Fees: Custom (typically 1-3%)
Minimum: $10,000/month
Pros: Industry expertise, flexible
Cons: Longer approval process

4. altLINE (Southern Bank)

Best for: Established businesses
Advance rate: Up to 90%
Fees: 0.5-3.5%
Minimum: $50,000/month
Pros: Bank-backed, competitive rates
Cons: Stricter requirements

5. Riviera Finance

Best for: Startups, small businesses
Advance rate: Up to 90%
Fees: 1-5%
Minimum: $5,000/month
Pros: Low minimums, flexible
Cons: Higher fees for small volumes

Who Should Use Invoice Factoring?

✅ Good Candidates:

• B2B companies with Net 30-90 payment terms
• Fast-growing businesses needing working capital
• Companies with creditworthy clients
• Businesses that can't get traditional loans
• Seasonal businesses with cash flow gaps

❌ Not Ideal For:

• B2C businesses (consumers don't pay invoices)
• Companies with immediate payment (no invoices to factor)
• Businesses with poor-quality clients
• Very small invoice amounts (under $1,000)

Alternatives to Invoice Factoring

• Business line of credit: Cheaper but requires good credit
• Invoice financing: Keep control of collections
• Term loan: Lower cost, fixed payments
• Merchant cash advance: Fast but expensive
• Improve payment terms: Request deposits, shorter terms

How to Choose a Factoring Company

1. Compare rates: Get quotes from 3-5 companies
2. Read contracts carefully: Watch for hidden fees
3. Check reviews: Look for complaints about collections
4. Understand minimums: Can you meet monthly requirements?
5. Ask about recourse: What happens if client doesn't pay?
6. Test customer service: Will they be responsive?

Questions to Ask Before Factoring

• What is the advance rate?
• What are ALL fees (not just factoring fee)?
• Is it recourse or non-recourse?
• What's the contract length?
• Are there monthly minimums?
• How do you handle collections?
• What happens if my client disputes the invoice?
• Can I factor some invoices or must I factor all?

Conclusion

Invoice factoring can be a lifeline for businesses with cash flow problems, but it's expensive. Before factoring, try to improve your invoicing process with faster payment terms, deposits, and automated reminders. Use InvoiceKit to create professional invoices that get paid faster, potentially eliminating the need for factoring!