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 flowis one of the biggest challenges facing B2B businesses. Payment termsoften stretch 30, 60, or even 90 days, leaving companies waiting on unpaid invoiceswhile payroll, materials, and operations can’t wait. For many, that gap creates a real strain on working capital.
A factoring companyoffers a way to bridge that gap, without taking on debt. Instead of applying for a traditional loan, a business can sell its outstanding invoicesto a factoring providerand receive a cash advancebased 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 companydoes, 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 flowand 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 companyevaluates the creditworthinessof 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 companysends the remaining balance to your business, minus a factoring feefor the service. This fast, flexible solution helps businesses unlock working capitaltied up in unpaid invoicesand can be a vital tool for covering expenses, funding growth, or managing operations smoothly.
How Does a Factoring Company Work?
The factoring processis 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 invoiceto the factor for review and funding.
- Customer credit check. The factoring companyevaluates 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 amountdirectly to the factoring company.
- Final payment minus fees. Once payment is received, the factor remits the remaining balance to you, subtracting a small factoring feefor the service.
Advance ratesand factoring feescan vary depending on your industry, customer base, and invoice volume. But in most cases, factoring allows businesses to convert unpaid invoicesinto predictable cash flowwithout waiting for payment termsto expire.
Factoring vs. Traditional Business Financing
When it comes to handling business cash flow issues, many companies consider either invoice factoringor 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 businessesand startups.
The key difference? A factoring companybases 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-termfinancing solution that improves liquiditywithout adding liabilities to your balance sheet. It’s especially valuable for businesses that may not qualify for bank loansor lines of creditdue to limitedcredit 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 servicesto stabilize cash flowand support growth, especially when traditional financing optionsfall short.
Here are common scenarios where working with a factoring companymakes sense:
- Startupswithout credit history. Factoring offers a way to secure funding without relying on your business credit scoreor lengthy financials.
- Businesses with slow-paying customers. Converting unpaid invoice paymentsinto upfrontcash helps smooth out inconsistent revenue cycles.
- Companies in rapid growth mode. When you’re scaling fast, factoring lets you access working capitalquickly without taking on new debt.
- Industries with long payment terms.Sectors like construction, freight, staffing, and health careoften face 60- to 90-day payment terms; factoring shortens the wait.
- Businesses turned down for loans. If you’ve been declined due to credit riskor balance sheetconcerns, factoring offers a viable alternative.
In all these cases, factoring helps business ownersaccess reliable, short-termfunding tied to their existing operations, not future obligations.
Key Benefits of Working With a Factoring Company
Factoring servicesoffer more than just quick cash—they provide flexibility and operational support that traditional lendersoften can’t match. Here’s how working with a factoring companycan benefit your business:
- Immediate accessto funds. No need to wait 30-90 days for customers to pay; factoring turns your unpaid invoicesinto upfrontliquidity.
- Flexible qualification. Approval is based on your customers’ creditworthiness, making it ideal for companies with limited credit historyor financial complexity.
- No new debt. Factoring is not a loan, so it doesn’t impact your balance sheetor increase liabilities, an advantage for businesses trying to stay agile.
- Outsourced collections.Many factoring companieshandle 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-termfinancing optionor a long-term strategy for managing cash flow, a factoring agreementwith the right financial institutioncan 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 companieswork, 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 invoicesto a factoring provider, who then advances cash and collects payment from your customers. Invoice financingis a loan secured by your accounts receivable—you remain responsible for collecting payment.
How much does factoring cost?
Factoring feestypically range from 1% to 5% of the invoice value, depending on your industry, customer credit quality, and payment terms. Higher feesand additional feesmay apply for things like credit checks, early funding, or non-notification agreements.
What is a typical advance ratefor factoring?
Most factoring companiesoffer advance ratesbetween 80% and 90%. Some industries, such as freight, may qualify for higher factoring ratesup to 97%.
What is non-recourse factoring?
In non-recourse factoring, the factoring providerassumes the risk if your customer doesn’t pay due to bankruptcy or insolvency. These agreements usually come with higher factoring feesto offset that risk.
Is factoring a good option for small businesses?
Yes. Factoring is especially useful for small businessesthat need fast, flexible access to capital without relying on credit historyor traditional bank loans.
Will my customers know I’m using a factoring provider?
In most cases, yes, your customer paymentsgo to the factoring companydirectly. However, some providersoffer 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 flowneeds or for testing the process before committing to an ongoing factoring agreement.
Why Businesses Choose Gateway Commercial Finance
Gateway Commercial Financebrings more than two decades of industry experience to every client relationship. Our team understands the unique challenges that small businessesface, especially when managing slow-paying customersand 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, frommedical transportationandcleaning and janitorialtoconstructionandoilfield services, so you get a funding solutionthat works with your business, not just for it.
If you’re looking for a funding partner who puts your business needsfirst, we’re ready to help.Request a quote todayor speak directly with a Gateway manager to learn how our factoring servicescan 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.