Invoice Factoring: All You Need to Know in 2025

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What factoring is, how it works, costs, and much more valuable information

Looking to unlock working capital without applying for a traditional loan? Invoice factoring could be the key.

Small and midsize businesses often struggle to secure funding from banks due to strict requirements or limited credit history. In 2024, 37% of small business owners had applied for a loan, line of credit, or merchant cash advance within the past year — however, loan applicants’ satisfaction with their lenders also decreased between 2023 and 2024.

This could reflect growing frustration with traditional financing experiences, pushing more business owners to seek faster, more flexible options like invoice factoring.

By converting outstanding invoices into fast funding, invoice factoring supports cash flow, covers operational costs, and avoids new debt or equity dilution. It’s an attractive option for businesses aiming to bridge cash flow gaps caused by extended payment terms.

In this guide, you’ll discover what factoring is, how it works, what it costs, and how it can strengthen your company’s financial position.

What Is Invoice Factoring?

Factoring is an accessible working capital solution for growing startups, small businesses, and established organizations that sell to creditworthy customers on credit.

Invoice factoring and invoice financing are often used interchangeably and, therefore, mistaken for the same thing. They are not! Invoice factoring is the sale of an asset. Invoice financing (or receivable financing) is a business loan that uses unpaid invoices as collateral.

How Does Invoice Factoring Work?

The invoice factoring process consists of four main components:

Your business
Your clients (debtors)
One or more outstanding invoices
A factoring company (the factor)

The factoring process involves seven steps:

Your business sells to another business and issues invoices due in 30 to 90 days.
You set up an account with a factor.
You submit your outstanding invoices to the factor.
The factor provides an immediate cash advance based on an agreed percentage.
The debtor pays the invoice.
The payment is deposited into a temporary reserve account.
The factor deducts the fees and amount advanced and wires the balance to your bank account.

how does factoring work - factoring process

Invoice Factoring Examples

Your business delivers product XYZ to Wholesale Inc., issues an invoice for $1,000, and gives the debtor 60 days to pay.
You sign an agreement with an invoice factoring company as follows: 80% advance rate and a 2% discount fee every 30 days.
You sell the outstanding invoice to the factor and receive an advance of $800.
On day 29 the debtor sends a check to a lockbox opened by the factor under your name.
The invoice factoring company receives the money and deposits it into a reserve account.
The factor takes $20 as a factoring fee, deducts the funds already advanced to you ($800), and sends you the $180 remaining balance (sometimes called a rebate).

Why Invoice Factoring Is Growing in 2025

With faster access to working capital, companies can cover payroll, invest in growth, and handle seasonal fluctuations more efficiently. Factoring’s flexibility and accessibility continue to make it a valuable financial resource across industries in the United States.

Pros and Cons of Invoice Factoring

The advantages include:

Quick cash flow boost
An alternative to using a credit card with high rates and limited available credit
You can give terms to your customers without worries
Low qualification requirements and a simple application process
High approval ratio
Cash flow without debt
No collateral or personal guarantees are required
Minimal credit score requirements
Operational support to A/R department
Much cheaper than invoice financing

On the other hand, there are also some potential disadvantages:

Not accessible to B2C (those that work only with consumers)
The pricing model might not suit your needs
More expensive than traditional business financing
Requires ceding some control of client interactions regarding A/R
Not a solution for unpaid invoices that are late or delinquent
Liability for non-creditworthy customers (in most cases)

Bank Financing vs. Invoice Factoring

If you cannot get an inexpensive business loan or want to avoid adding more debt to your ledgers, factoring may be the best answer when you experience cash flow shortages.

Invoice Factoring vs. Invoice Financing

This is the most important piece of information that you need to consider when you compare factoring with invoice financing:

Invoice factoring is a sale transaction.
Invoice financing is a business loan.

The 2 Types of Invoice Financing

You’ll find two types of invoice financing offers:

Receivable financing offered by traditional, renowned banks
Invoice financing by online lenders

The first type is similar to a traditional bank loan and much cheaper than the second choice. This type of finance has high approval conditions and requires your business to have an excellent financial background and credit score. If you qualify, ask your banker for the details.

The second one is offered all over the web by lenders that want you to confuse factoring with their “invoice financing” offer. They are highly accessible and risky business loans mainly marketed to small businesses with periodic installments. They use your receivables as an excuse to lend you expensive capital, but they don’t care if your customer can pay.

Be aware! Many small businesses fall for these receivable financing offers and lose all their margins to cover interest charges.

Please check this article if you want to learn more about these invoice finance businesses.

How Do Companies Qualify For Factoring?

The basic invoice factoring requirements:

Your business is selling products or services to other businesses or the government.
Your company’s annual revenue exceeds $50,000.
Your clients are expected to pay in 30 to 90 days.
Your clients are creditworthy.

Qualification requirements vary between different invoice factoring companies. Feel free to read our article about Invoice Factoring Requirements for other potential criteria.

How Much Cash Will You Get Upfront With Invoice Factoring?

The amount you receive upfront depends on your agreement’s advance rate. Here’s a quick breakdown to help you estimate your initial cash infusion, and what to expect once your customer pays:

Your upfront cash = Advance % × Invoice value. So, if your advance rate is 80% and you factor a $2,000 invoice, you’ll receive $1,600 upfront.
You’ll also get more later, minus the factoring fee. The remaining 20% (called the reserve) is held back and released once your customer pays the invoice, minus any factoring fees.
Typical advance rates range from 75% to 90% of the invoice value. Read “What factoring advance can you get?” to understand how invoice factoring companies determine your advance percentage.

The Costs of Invoice Factoring

Most factors use one of the following discount rate structures to calculate fees:

A flat discount
A combination of a flat discount and PRIME plus Margin

To learn more, read “How much does factoring cost?”

Here’s information about our published invoice factoring rates.

Other Typical Factoring Contract Provisions

In addition to service fees, most invoice factoring agreements also include the following stipulations:

Recourse or Non-recourse Factoring

Recourse factoring protects the factor when receivables become delinquent, requiring you to repay the money advanced.

Also, it usually requires that you have credit insurance to cover the factor’s risk of potential delinquency. Your customers need to be highly creditworthy to be approved by the insurance agency.

For a more detailed explanation of these alternatives, please check out “Non-recourse versus recourse factoring arrangements”.

Invoice Factoring Minimums: How Many Invoices Do You Need To Factor?

Many invoice factoring agreements include monthly minimum volume requirements, which are important to understand before partnering with a factoring company. These minimums exist because processing a low number of invoices is less cost-effective for the provider. Managing smaller accounts results in higher relative operational costs, making it less efficient from a business standpoint.

Can You Factor Just One Invoice?

Yes — some providers offer spot factoring, which allows you to sell a single invoice without committing to a long-term contract or volume minimums. Spot factoring is ideal for companies that need a quick, one-time cash boost rather than improved cash flow. However, keep in mind that ongoing relationships with factoring companies generally come with lower fees and more favorable terms due to the predictability and scale of volume.

Looking for Flexible Financing Options?

Call Gateway Commercial Finance today at 1-855-424-2955 or visit our website to learn how invoice factoring services can support your business goals and cash flow needs with tailored solutions and no hidden fees.

Invoice Factoring FAQ

Still have questions about invoice factoring? We have answers:

How Can Business Owners Be Eligible for Factoring?

Invoice factoring is available exclusively to B2B operations (enterprises that sell to businesses or the government). Unfortunately, factoring is not structured to serve retail shops.

Which Industries Use Invoice Factoring?

Invoice factoring is widely used across a range of industries where cash flow gaps are common — including, but not limited to:

Staffing
Trucking & freight
Transportation
Construction
Manufacturing
Distribution
Apparel
Security guards
Commercial service providers

Why Might a Business Choose Invoice Factoring?

Reasons for accessing factoring financing could include:

You need temporary cash flow for ongoing expenses, payroll, and other vendor bills.
You cannot get working capital from a financial institution.
You need cash flow to complement your current financing.
You choose to avoid adding debt to your ledger.
You have slow-paying customers.
You can’t meet your financial obligations.

Factoring clients typically share one or more of the following characteristics:

An insufficient line of credit, credit history, or bad credit scores
Troubled past, including prior bankruptcies or forbearance
Credit denied or maxed out
Small businesses with rapid growth
Operating losses
Negative net worth
Highly leveraged
Delinquent taxes
Lack of collateral

Author: Marc J Marin

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.