What is a Factoring Company and How Does It Work?
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A complete guide to factoring companies: Definition, types, who is who, what to look for, and what to avoid
Cash flow is one of the biggest challenges facing B2B businesses. Payment terms often stretch 30, 60, or even 90 days, leaving companies waiting on unpaid invoices while payroll, materials, and operations can’t wait. For many, that gap creates a real strain on working capital.
A factoring company offers a way to bridge that gap, without taking on debt. Instead of applying for a traditional loan, a business can sell its outstanding invoices to a factoring provider and receive a cash advance based on the invoice value. This approach provides fast access to funds and can be especially useful for small businesses, startups, and companies with slow-paying customers.
In this article, we’ll explain exactly what an invoice factoring company does, how the process works, and when factoring might be the right solution for your business. Whether you’re new to the concept or ready to explore providers, this guide covers the essentials to help you understand how factoring supports cash flow and business growth.
What is a Factoring Company?
A factoring company or factoring firm is a financial services provider that purchases a business’s unpaid invoices, known as accounts receivable factoring, and advances a percentage of the invoice value upfront. This process gives companies immediate cash flow instead of waiting weeks or months for customers to pay.
Factoring is not a business loan. It doesn’t create debt or rely on your credit score. Instead, the factoring company evaluates the creditworthiness of your customers and bases funding decisions on their ability to pay. Once the invoices are verified, the factor advances a portion of the invoice—often 80% to 90%—via cash transfer, then collects payment directly from your customer.
After receiving full payment, the factoring company sends the remaining balance to your business, minus a factoring fee for the service. This fast, flexible solution helps businesses unlock working capital tied up in unpaid invoices and can be a vital tool for covering expenses, funding growth, or managing operations smoothly.
How Does a Factoring Company Work?
The factoring process is simple, fast, and designed to give businesses access to capital without taking on debt. Here’s how it typically works, step by step:
- Deliver goods or services. Your business completes the work or shipment and issues an invoice to your customer with standard payment terms (often net 30-90 days).
- Submit the invoice to a factoring company. You send the unpaid invoice to the factor for review and funding.
- Customer credit check. The factoring company evaluates your customer’s creditworthiness, not yours, to determine the risk of non-payment.
- Receive an advance. If approved, the factor provides a cash advance, usually 80% to 90% of the invoice value, often within 24 to 48 hours.
- Customer pays the factor directly. When payment is due, your customer sends the full invoice amount directly to the factoring company.
- Final payment minus fees. Once payment is received, the factor remits the remaining balance to you, subtracting a small factoring fee for the service.
Advance rates and factoring fees can vary depending on your industry, customer base, and invoice volume. But in most cases, factoring allows businesses to convert unpaid invoices into predictable cash flow without waiting for payment terms to expire.
Factoring vs. Traditional Business Financing
When it comes to handling business cash flow issues, many companies consider either invoice factoring or a traditional bank loan. While both can provide working capital, they function very differently, and factoring is often the more accessible and flexible option, especially for small businesses and startups.
The key difference? A factoring company bases approval on your customer’s creditworthiness, while banks scrutinize your company’s financials, credit score, and balance sheet. Here’s how the two compare:
Criteria | Factoring company | Traditional bank loan |
Approval basis | Customer’s creditworthiness | Business financials and credit score |
Funding timeline | Same-day to 48 hours | Weeks to months |
Impact on credit | No impact on business credit score | Appears on credit history |
Collateral required | None | Assets, guarantees, balance sheet |
Debt created | None | Yes |
Factoring is a short-term financing solution that improves liquidity without adding liabilities to your balance sheet. It’s especially valuable for businesses that may not qualify for bank loans or lines of credit due to limited credit history, inconsistent financials, or rapid growth.
When Does It Make Sense To Use a Factoring Company?
Factoring is a strategic funding tool that solves real operational challenges. Many companies use factoring services to stabilize cash flow and support growth, especially when traditional financing options fall short.
Here are common scenarios where working with a factoring company makes sense:
- Startups without credit history. Factoring offers a way to secure funding without relying on your business credit score or lengthy financials.
- Businesses with slow-paying customers. Converting unpaid invoice payments into upfront cash helps smooth out inconsistent revenue cycles.
- Companies in rapid growth mode. When you’re scaling fast, factoring lets you access working capital quickly without taking on new debt.
- Industries with long payment terms. Sectors like construction, freight, staffing, and health care often face 60- to 90-day payment terms; factoring shortens the wait.
- Businesses turned down for loans. If you’ve been declined due to credit risk or balance sheet concerns, factoring offers a viable alternative.
In all these cases, factoring helps business owners access reliable, short-term funding tied to their existing operations, not future obligations.
Key Benefits of Working With a Factoring Company
Factoring services offer more than just quick cash—they provide flexibility and operational support that traditional lenders often can’t match. Here’s how working with a factoring company can benefit your business:
- Immediate access to funds. No need to wait 30-90 days for customers to pay; factoring turns your unpaid invoices into upfront liquidity.
- Flexible qualification. Approval is based on your customers’ creditworthiness, making it ideal for companies with limited credit history or financial complexity.
- No new debt. Factoring is not a loan, so it doesn’t impact your balance sheet or increase liabilities, an advantage for businesses trying to stay agile.
- Outsourced collections. Many factoring companies handle invoice monitoring and payment follow-up, reducing your administrative load.
- Custom solutions. Factors can tailor terms, advance rates, and services to fit your industry, invoice cycle, and funding volume.
Whether you need a short-term financing option or a long-term strategy for managing cash flow, a factoring agreement with the right financial institution can offer both speed and support without the traditional borrowing costs.
Common Questions About Factoring Companies (FAQs)
If you’re new to factoring, you’re not alone. Below are answers to some of the most frequently asked questions about how factoring companies work, what they cost, and how they compare to other financing options.
What’s the difference between factoring and invoice financing?
Factoring involves selling your unpaid invoices to a factoring provider, who then advances cash and collects payment from your customers. Invoice financing is a loan secured by your accounts receivable—you remain responsible for collecting payment.
How much does factoring cost?
Factoring fees typically range from 1% to 5% of the invoice value, depending on your industry, customer credit quality, and payment terms. Higher fees and additional fees may apply for things like credit checks, early funding, or non-notification agreements.
What is a typical advance rate for factoring?
Most factoring companies offer advance rates between 80% and 90%. Some industries, such as freight, may qualify for higher factoring rates up to 97%.
What is non-recourse factoring?
In non-recourse factoring, the factoring provider assumes the risk if your customer doesn’t pay due to bankruptcy or insolvency. These agreements usually come with higher factoring fees to offset that risk.
Is factoring a good option for small businesses?
Yes. Factoring is especially useful for small businesses that need fast, flexible access to capital without relying on credit history or traditional bank loans.
Will my customers know I’m using a factoring provider?
In most cases, yes, your customer payments go to the factoring company directly. However, some providers offer non-notification factoring where the relationship remains private.
Can I factor just one invoice?
Yes. This is known as spot factoring. It’s ideal for businesses with occasional cash flow needs or for testing the process before committing to an ongoing factoring agreement.
Why Businesses Choose Gateway Commercial Finance
Gateway Commercial Finance brings more than two decades of industry experience to every client relationship. Our team understands the unique challenges that small businesses face, especially when managing slow-paying customers and unpredictable cash flow. That’s why we offer same-day funding, transparent pricing, confidential services, and flexible terms that adapt to your operational needs.
Unlike many financial institutions, we provide direct access to decision-makers from day one. You won’t waste time going through layers of sales reps or waiting weeks for approval. Our clients also benefit from personalized service and industry-specific expertise, from medical transportation and cleaning and janitorial to construction and oilfield services, so you get a funding solution that works with your business, not just for it.
If you’re looking for a funding partner who puts your business needs first, we’re ready to help. Request a quote today or speak directly with a Gateway manager to learn how our factoring services can support your business goals.
Discover Gateway’s unique offerings by calling 1-855-424-2955. Our experienced decision-makers are ready to help you get started!
Marc Marin is a seasoned expert in business financing, author, speaker, and educator with over 20 years of experience helping companies access working capital through factoring and funding solutions. He is known for making complex financial topics clear and actionable for business owners and finance professionals.