Invoice financing and invoice factoring both unlock working capital from invoices, but mechanically, they work differently. Factoring is the sale of invoices to a third party, while financing lets you borrow against invoices.
Cash flow remains one of the biggest challenges for businesses, with billions tied up in unpaid invoices at any given time. According to The Business Research Company, the global invoice factoring market was valued at approximately US$3.09 trillion in 2024, highlighting a strong market demand for accessible working capital solutions.
At the same time, Days Sales Outstanding (DSO) is rising across industries in 2025, as companies increasingly delay payments to preserve their own cash, putting additional strain on suppliers waiting to get paid.
Choosing the right option depends on qualification. Factoring offers fewer barriers to qualify, while invoice financing is typically a product offered by a bank. Along with it comes a higher bar to qualify.
What Is Invoice Factoring and How Does It Help Your Cash Flow?
Invoice factoring is when a business sells its unpaid invoices to a factoring company to receive immediate cash, often 80%–97.50% of the invoice value. Factoring helps both prebankable businesses and fast-growing enterprises improve liquidity, cover operational costs, and manage cash flow.
Step-by-step Invoice Factoring Process
Here is your step-by-step process:
- After your account is set up (assume 3-5 business days)
- Submit your invoices to the factoring company.
- The factor verifies invoice accuracy and customer credit (generally, same day).
- You receive an advance of 80%–97.5% of the invoice value.
- The factor collects payment in your customer’s normal course of business
The remaining balance is remitted to you minus the factoring fee (1% to 3% for 30 days).
Industries That Commonly Use Invoice Factoring
Invoice factoring is widely used in industries with long payment cycles (Net terms from 30 to 120 days) or high upfront expenses. For example, manufacturing, which made up more than 22% of the global invoice factoring market in 2024 (Market.us), relies on it to finance materials, labor, and production costs.
Staffing agencies depend on factoring to meet weekly payroll while waiting for client payments, telecom and wireless contractors benefit when carriers delay payments, utility subcontractors use it to stabilize cash flow over long project timelines, and wholesale distributors factor invoices to handle high‑volume orders without straining cash reserves.
What Does Invoice Financing Mean for Your Business?
Invoice financing allows businesses to borrow money against invoices as collateral via a borrowing base with strict eligibility criteria from the bank. Unlike invoice factoring, the business generally borrows (only 1 time per month) a percentage of the eligible collateral. While Invoice Financing allows you to maintain control over collections, it offers no other support, such as receivables management, credit monitoring, or reporting. Most businesses that qualify for Invoice Financing must have the capability to generate reliable financial statements and demonstrate their ability to manage their A/R effectively.
How Borrowing Works
A business that qualifies for Invoice Finance will set up a borrowing base with the bank, and within that will be parameters for what will be considered eligible to borrow against. There’s no wiggle room on borrowing and eligibility will be based on, client concentration (generally not to exceed 10%,) Net Terms (often will not get eligibility on terms greater than Net 60), Cross age formula (any customer that has more than 50% of the total balance greater than 60 days or more than 25% greater than 90 days) the entire account will not be eligible, certain customers that the bank does not credit approve may also be excluded, contra accounts will be excluded and you may be required to have a credit insurance policy. In addition, there will be financial covenants that also must be maintained.
Controls: You’ll continue to manage customer communication, billing, and collections internally. This setup keeps existing customer relationships linear and ensures that your accounting team oversees every stage of the receivables cycle, maintaining full visibility over payments and workflow.
Invoice Financing vs Factoring: Core Differences Every Business Should Know
The key difference between invoice financing vs invoice factoring is qualification and funding availability. Invoice Factoring is often far more flexible and agile than Invoice Financing.
| Feature | Invoice Factoring | Invoice Financing |
| Ownership | Invoices are sold to a factor | Invoices are used as collateral, but you retain ownership |
| Advance Rate | Typically 80%-97.50% | Usually 70-85% |
| Fees / Cost Structure | Discount rate: 1-3% invoice rate for 30 days. | Interest + monthly service fees |
| Collections | Factor receives collections | Your business collects |
| Balance Sheet Impact | Off-balance sheet (not recorded as debt) | Recorded as debt, since it’s a loan |
| Credit Risk | With recourse factoring, risk stays with you. With non-recourse, the factor bears some risk | You bear the risk. If customers don’t pay, you still owe the finance provider |
| Contractual Requirement | Often requires minimum monthly volume commitments. | Structured as a loan with a typical term and loan covenants. |
| Speed of Closing | Set-up generally takes 3-5 working days | 30 to 90 days to close. |
| Market Scale & Trend | Around US$3,094 billion | Demand is rising as businesses seek working capital while retaining control. |
The biggest differences between invoice financing vs invoice factoring are funding availability, control, and cost. Factoring sells your invoices to a third party, giving them responsibility for monitoring. Invoice financing, however, lets you retain ownership and manage collections internally.
Advance rates and fees also differ. Factoring typically provides 80–97.5% of invoice value upfront, while financing offers 70–85%. Factoring charges a 1–3% discount fee for 30 days, whereas financing involves interest plus monthly fees. The choice often depends on qualification, cash-flow demands, internal capacity, and accounting capabilities.
Collections responsibility and balance-sheet impact matter too. Factoring outsources collections and is usually off-balance-sheet, reducing debt on your books. Financing keeps collections in-house and is recorded as debt, meaning your liabilities increase, but you maintain control over client communication.
Contract terms and funding speed also vary. Factoring may require minimum invoice volumes or contracts and can provide funds after the account is established in 3-5 business days. Invoice financing is more rigid, with loan repayment tied to actual customer payments. Non-payments affect borrowing availability.
Market trends highlight that both are growing in use. The global factoring market reached US$3,094 billion in 2024, growing at a CAGR of 11.9%, while financing demand is rising as businesses seek working capital without losing invoice ownership.
Which Option Is Better for My Situation?
The question comes first to qualification. If you’re bankable, your business revenue is predictable, strong guarantors, and reliable financial reporting showing a history of profitability and a positive net worth, then invoice financing might be a better tool. Factoring suits non-bankable and fast-growing businesses.
Does factoring work better for staffing companies?
Start-up staffing firms often face cash-flow gaps because they pay employees daily or weekly, while clients may take 30–90 days to pay invoices. Factoring lets most agencies access 85%–95% of the invoice value. This ensures payroll is always covered, greatly reducing owner stress. Factors also manage receivables monitoring and credit, freeing managers to focus on new sales and employee recruitment. Factoring provides fast, debt-free liquidity for ongoing operations with no artificial ceiling.
Is factoring or financing better for telecom/wireless contractors?
Telecom contractors often wait 60 days or more for client payments. Slow project managers, bulky close-out packages, and change orders slow the paperwork and payment process. Factoring advances up to 85-90% of invoice value in the telecom industry, providing funds to cover travel, per-diem, material, and payroll. It shifts monitoring responsibility to the factor, reducing administrative burden for owners in the field.
What about utility subcontractors?
Utility subcontractors often face irregular payments 30–60 days after draw requests. Factoring converts invoices into immediate cash, usually 70–85% of the value, to cover payroll and materials. This keeps projects running smoothly without taking on debt. It also reduces reliance on delayed payments from large clients. Quick access to working capital ensures operational stability.
What should wholesale and manufacturing companies choose?
Wholesale and manufacturing companies often deal with large invoices and 90–120 day payment cycles. Factoring provides liquidity to buy raw materials and pay labor without adding debt. Invoice factoring might be a better solution for a mature business with predictable revenue. The choice depends on cash-flow needs, invoice volume, and operational priorities. Both solutions help maintain smooth operations
What Are the Costs and Fees for Invoice Financing and Factoring?
Factoring fees usually range from 1–3% per month, depending on factors like customer credit risk, volume, net terms, industry type, and whether the agreement is recourse or non-recourse.
Invoice financing costs work differently, as businesses pay interest plus (assume prime or SOFR plus a margin of 2-5%), monthly administration fees, monitoring fees, lockbox fees, line fee, renewal fee, unused line fee, and field exam expenses in addition to the borrowed amount. These additional costs, in addition to the interest, will often total 11-16% APR. Unlike factoring, financing adds debt to the balance sheet, which may affect credit capacity and financial planning.
When choosing between the two, it’s essential to be realistic about qualification, actual funding needs now and into the future, ability to operate within covenants, and the fees. Factoring provides far more funding availability and more flexibility for growing businesses, but it comes at a marginally higher price than invoice financing. Businesses should consider invoice volume, payment cycles, and customer relationships before deciding.
How Do I Qualify for Invoice Factoring?
Qualification for invoice factoring largely depends on your customers’ creditworthiness. Gateway Commercial Finance evaluates customer credit using credit-reporting agencies such as Dun & Bradstreet, LexisNexis, and Ansonia.
They also consider a diversified customer base. Businesses that rely heavily on one or two clients are seen as higher risk. The underwriting process also checks invoice quality, operational compatibility, and reporting frequency.
Specific invoice factoring criteria may include minimum monthly sales requirements, often around US$25,000, and invoicing to creditworthy clients with payment terms of 30-90 days. Businesses that meet these standards, have a diversified client base, and maintain transparent reporting have the best chance of fast approval for invoice factoring solutions.
How Gateway Commercial Finance Helps You Choose the Right Option
Gateway Commercial Finance serves as a strategic partner for businesses navigating the differences between invoice financing and invoice factoring. Beyond evaluating cash-flow needs, customer credit quality, and invoice volume, their team conducts a deeper financial and operational assessment to recommend the most effective working-capital structure. The reality is, invoice factoring is not always the best fit.
How Gateway Commercial Finance Supports Your Decision:
- The business development team will have a candid conversation with a business about its situation and potential financing options.
- Performs a full receivables review to identify bottlenecks, aging risks, and opportunities for faster cash conversion.
- Analyzes credit across your customer base.
- Reviews your internal accounting workflow to align funding structures with reporting accuracy and operational capacity.
- Provides industry-specific guidance, using insights gained from funding over $4B across staffing, telecom, manufacturing, distribution, security guards, utilities, and wholesale sectors
- Offers risk-mitigation strategies, such as credit insurance or selective factoring, for businesses with uneven customer reliability.
- Supports scalability, ensuring your funding can grow as your sales increase without disrupting operations
With this multi-layered approach, Gateway Commercial Finance does more than approve funding. It helps businesses strengthen financial stability, streamline receivables management, and select a solution aligned with long-term goals. Their advisory team ensures companies understand not just which option is cheaper or faster, but which option creates lasting cash-flow efficiency, meets cost parameters, and supports sustainable growth.
Key Takeaways: Choosing Between Invoice Financing, Factoring & Alternative Funding
Many businesses face a dilemma when choosing how to unlock working capital, whether to go with invoice financing, invoice factoring, or explore alternative financing options. Each solution offers different benefits depending on qualifications, cash-flow needs, risk tolerance, and customer-relationship priorities.
How to Decide Which Option Fits Best
When evaluating funding solutions, it helps to break down the key differences and match them to your business situation:
- Speed: Factoring delivers very timely solutions (same-day proposals and first funding within 3-5 days). Invoice financing can take up to 90 days to structure.
- Flexibility vs. Funding Cap: Invoice Factoring is one of the few financing methods that grows in tandem with your sales. Invoice financing often caps the amount it can provide based on leverage and operating history. Fast-growing companies may find a poorly thought-out invoice financing line insufficient in a short period of time.
- Alternative funding trade-offs: Options like lines of credit, merchant cash advances (MCAs), or equity funding have their place, but each has a drawback.
Here are the deeper insights and statistical benchmarks to guide your decision.
Detailed Insights and Statistics
When comparing invoice financing, invoice factoring, and alternatives, consider these factors and how they apply to your business:
1. Prevalence of Lines of Credit
According to the 2024 Small Business Credit Survey, 34% of employer firms regularly use a business line of credit.
This makes lines of credit one of the most common funding products for small to mid-sized companies.
2. Growth of the Alternative Financing Market
The global alternative financing market is expanding rapidly. According to a report, it’s expected to grow with a compound annual growth rate (CAGR) of about 20.7%.
This surge indicates that more unqualified banking borrowers are turning to non-traditional financing options like invoice financing, peer-to-peer lending, and merchant cash advances.
3. Comparing Cost Structures and Risk.
Merchant cash advances (MCAs) provide very fast access to cash, but their effective cost tends to be higher than more traditional debt. Interest rates range from 36-90%.
Equity funding removes the burden of repayment, but requires giving up ownership, which may not align with all growth strategies.
Traditional bank loans or lines of credit may be cheaper, but approvals can take longer and may come with stricter covenants.
4. Strategic Trade-offs
Use invoice factoring when your priority is immediate liquidity and runway for growth. Choose invoice financing when your business is stable and predictable.
Consider alternatives if you need long-term capital, scalable growth, or want to avoid adding short-term debt, but be ready to evaluate different cost, risk, and control factors.
FAQs
Is invoice financing the same as invoice factoring?
Invoice financing and factoring both unlock cash from unpaid invoices, but they differ in structure. Factoring involves selling invoices to a third party, while financing borrows against invoices and lets the business manage customer communication and billing internally.
How quickly can I get funds with invoice financing?
Businesses can typically receive funds within 24–48 hours of invoice approval. Timing depends on the factoring company’s underwriting processes and verification speed. Once approved, invoice factoring provides fast working capital, making it useful for covering payroll, operating expenses, and short-term cash-flow gaps without waiting for customer payments.
What percentage does a factoring company charge?
Factoring companies usually charge 1–3% every 30 days, depending on the customer’s credit rating, invoice size, payment terms, industry risk, and whether the agreement is recourse or non-recourse.
Is invoice factoring a good idea for small businesses?
Invoice factoring is often an excellent choice for small businesses needing fast, debt-free cash flow. It converts unpaid invoices into immediate working capital, supports payroll and daily expenses, and reduces strain caused by long payment cycles, though fees may be higher than traditional financing options. Factoring is an excellent tool for start-up and fast-growing businesses.
What are the disadvantages of invoice financing?
Qualifying for invoice financing may take up to 90 days. Invoice financing adds short-term debt to your balance sheet and requires your business to manage collections internally. It’s a timely qualification process, and funds may be limited to a maximum borrowing percentage. It also relies heavily on accurate reporting and strong accounting practices, which may be challenging for early-stage or fast-growing companies.
Final Thoughts: When Is Invoice Financing a Better Option?
Invoice financing is an excellent choice for businesses with strong internal accounting systems, predictable receivables, and a bank-ready profile.
This solution provides flexible borrowing against unpaid invoices while adding manageable debt to the balance sheet, making it a strategic option for firms that want liquidity without outsourcing collections.
Ready to improve cash flow? Contact Gateway Commercial Finance today for a free funding assessment and discover which option, invoice financing or invoice factoring, best meets your business needs.
