How does invoice factoring work, step by step?
Factoring turns an invoice you have already earned into cash now instead of in 30, 60 or 90 days. You deliver the goods or finish the work, invoice your customer as usual, and submit that invoice to the factor on a schedule of accounts. The factor verifies it, buys it and wires an advance to your operating account.
Your customer then pays the factor directly, usually to a lockbox or a bank account controlled by the funder. When that payment lands, the factor releases the balance it held back (the reserve), less its fee. That is the whole cycle. On an active facility you might submit invoices daily or weekly and the cycle repeats continuously.
Because the funder is buying the receivable, it underwrites your customers’ ability to pay more heavily than your own balance sheet. That is why factoring works for companies a bank has declined, companies that are growing faster than their credit line, and companies with thin history but strong customers. For a deeper walk-through, see how invoice factoring works.
What are advance, reserve and rebate?
The advance is the cash you get up front, expressed as a percentage of the invoice face value. The reserve is what the factor holds back to cover the fee, short-pays, credits and disputes. The rebate is the reserve paid back to you once the customer pays, net of the fee.
Here is a simple illustration on a $100,000 invoice with a 90% advance, a fee of 2.5% for the first 30 days plus 0.08% per day after that, and a customer that pays in 40 days. You receive $90,000 on day one. The customer pays $100,000 to the factor on day 40. The fee is $2,500 for the first 30 days plus $800 for the next 10, or $3,300, and the rebate to you is $100,000 minus $90,000 minus $3,300, or $6,700.
| Item | Amount | When |
|---|---|---|
| Advance wired to you | $90,000 | Day 1 (after verification) |
| Reserve held by factor | $10,000 | Day 1 to customer payment |
| Customer pays factor | $100,000 | Day 40 |
| Factoring fee (illustrative) | $3,300 | Deducted from reserve |
| Rebate released to you | $6,700 | Usually within days of payment |
A higher advance is not automatically a better deal. A 95% advance with a steep fee and a long minimum term can cost more than an 85% advance with clean pricing. Run both through the factoring cost calculator.
How are factoring fees structured?
Factoring pricing comes in three common shapes, and the shape matters as much as the headline rate. Two proposals quoting “2%” can produce very different bills once your customers’ real payment speed is applied.
Whatever the structure, ask for every charge in writing: application, due diligence, lockbox, wire, ACH, credit check, invoice processing, minimum volume and termination fees. Our proposal decoder and the factoring proposal checklist walk through the line items that move the true cost.
| Structure | How it is charged | Works best when | Watch for |
|---|---|---|---|
| Flat | One fee per period, e.g. roughly 1.5%–3% per 30 days, billed in 30-day blocks | Customers pay predictably inside the first period | Day 31 triggers a full second period |
| Tiered / incremental | Initial fee for the first 30 days, then smaller increments every 10 or 15 days | Payment timing varies across customers | Increments that compound on slow payers |
| Prime-plus (discount + interest) | Small admin fee per invoice plus interest on funds actually advanced, e.g. prime plus a margin | Larger, steady volume with strong debtors | Monthly minimums and unused-line fees |
Recourse or non-recourse: which do you need?
In a recourse facility, you buy back or replace an invoice your customer does not pay within an agreed window, often 90 days. In a non-recourse facility, the factor absorbs the loss if a customer becomes insolvent and cannot pay. Non-recourse almost never covers disputes, short-pays or quality claims, only credit failure of an approved customer.
Recourse is more common and usually cheaper. Non-recourse can make sense if one or two customers make up most of your sales and you want credit protection on them. Read the definition of a “credit event” carefully, because that is where most non-recourse coverage is narrower than owners expect. More detail is in recourse vs. non-recourse factoring.
Will my customers know I am factoring?
In most facilities, yes. Notification factoring means your customers receive a notice of assignment directing payment to the factor. This is normal across staffing, manufacturing, distribution and government contracting, and most large accounts payable departments process these notices routinely.
Some funders offer non-notification structures for larger, well-established companies, where customers keep paying you and you forward collections. Expect tighter reporting and usually a higher bar to qualify. Government receivables require a formal assignment under the Assignment of Claims Act in most cases. See notification vs. non-notification for how each is set up.
What do you need to apply for invoice factoring?
A funder can issue a term sheet quickly from a short list of documents. The full underwriting set comes after you accept terms.
| Document | Stage | Why the funder wants it |
|---|---|---|
| AR aging (detail, by customer) | Term sheet | Sizes the facility and shows concentration and payment speed |
| AP aging | Term sheet | Flags vendors who could claim the receivables or slow payments |
| Sample invoices and proof of delivery or timesheets | Term sheet | Confirms invoices are for completed, undisputed work |
| Customer list with contact info | Underwriting | Credit checks and verification calls |
| Articles, EIN letter, owner IDs | Underwriting | Know-your-customer and authority to sign |
| Recent business bank statements (3–6 months) | Underwriting | Cash flow, existing debts, MCA debits |
| Tax returns or financial statements | Underwriting | Overall health; requirements vary by size |
| Proof of payroll and sales tax status | Underwriting | Tax liens can prime the factor’s position |
| Existing loan or factoring agreements | Underwriting | UCC lien search and payoff or subordination needs |
How long does it take to set up a factoring facility?
A complete, clean file commonly gets a term sheet in 1–3 business days and first funding in roughly 1–3 weeks. The biggest time drivers are existing liens, unfiled tax returns, customer verification and any lender that has to sign a release or subordination.
After setup, each new batch of invoices typically funds in 24–48 hours once verified. Files under $500K with clean liens may qualify for our small-ticket express track, which can fund in about a week.
What does FactorRoute not finance?
We route B2B and government receivables. We do not place freight or owner-operator trucking factoring, consumer receivables, or facilities under $50K. Medical receivables billed to insurers or government payors are reviewed case by case only. If your file is outside the box, we will tell you plainly rather than waste your week.
Step by step
- Run a fit checkAnswer a few questions in the do-I-qualify tool or send your AR aging so we can see facility size, customer mix and concentration.
- Get matchedWe review the file and route it to funders whose appetite fits your industry, size and lien situation.
- Compare term sheetsReview advance, fee structure, minimums, term and termination side by side before choosing.
- Complete underwritingThe funder runs UCC and tax lien searches, verifies invoices and customers, and prepares the factoring agreement.
- Fund and repeatSign, send notices of assignment, submit your first schedule and receive the advance, usually within 24–48 hours of verification.
Illustrative scenario
Janitorial contractor outgrows its bank line
A Southeast commercial cleaning company billing about $650K a month to property managers and hospitals had a $250K bank line that was maxed. Customers paid in 45–60 days and a new hospital contract would add $120K a month of payroll before the first invoice was paid.
- $1.5MM factoring facility with an 88% advance on approved debtors
- Tiered fee: an initial 30-day rate plus 10-day increments, so fast payers cost less
- Bank agreed to release its lien on receivables and kept an equipment loan
- Notification letters sent to 22 customers; hospital system paid via its standard vendor portal
Outcome: The company funded payroll on the new contract from week one, retired the maxed line, and its effective cost tracked customer payment speed instead of a flat monthly charge.
A composite example for illustration, not a specific client, offer or promise of terms.
Questions people ask
Is invoice factoring a loan?
No. Factoring is the purchase of receivables, so the funder is buying an asset rather than lending against your balance sheet. It typically does not appear as debt on your balance sheet the way a term loan does. Your accountant should advise on how to book it for your company.
Do I have to factor every invoice?
Not always. Many facilities fund invoices from approved customers only, and some let you choose which invoices to submit. Others require you to factor all receivables from named customers or set a monthly minimum, so read the volume clause before signing.
What credit score do I need for factoring?
Your customers’ credit matters more than your personal score. Funders still check owners for fraud, tax liens and judgments, and very weak personal credit can affect terms. A strong customer list often outweighs a modest owner score.
How much can I get through invoice factoring?
Facility size is driven by your eligible receivables. A company with $400K of eligible AR and an 85% advance could expect roughly $340K of availability, growing as sales grow. We route facilities from $50K to $3MM to direct factoring partners, and larger ones to the factors and ABL lenders described on our large AR facilities page.
What makes an invoice ineligible?
Common exclusions are invoices over 90 days old, invoices to related companies, progress or pre-bills for work not yet done, invoices with disputes or offsets, and concentrations above a set percentage in one customer. Government and construction invoices carry their own rules on assignment and retainage.
Can I get out of a factoring agreement later?
Yes, but terms vary. Most agreements run 6–24 months with notice periods and possible early termination fees. A new funder can usually buy out your current factor; see factor buyout for the mechanics.
Will factoring hurt my relationship with customers?
Usually not, when it is handled professionally. Customers typically see a change in remittance instructions and an occasional verification call. Ask any prospective funder how it handles collections and disputes before you sign.