Accounts Receivable Factoring: What It Is, How It Works & Costs

Factoring receivables lets businesses access cash by selling invoices for cash advances.

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Updated Mar 13, 2026 · 3 min read

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Accounts receivable factoring is a way of financing your business by selling unpaid invoices for cash advances. Though it can be expensive, this method can also make sense to bridge cash-flow gaps.

And because receivables factoring isn’t technically a small-business loan, it can be a good option for business owners with uneven or short credit histories who may not qualify with a traditional lender.

What is accounts receivable factoring?

Accounts receivable factoring, also known as factoring receivables or invoice factoring, involves selling your unpaid invoices for cash advances. A factoring company pays you a large percentage of the outstanding invoice amount, follows up with your customer for payment, then pays you the remainder of what you’re owed, minus fees.

How does accounts receivable factoring work?

1. The factoring company advances you a percentage of your invoice.

Advance amounts vary depending on the industry, but can be as much or more than 90%.

2. The company takes over payment collection.

Your customer pays the factoring company the full value of the invoice.

3. You receive the remainder of the invoice amount, minus fees.

The factoring company pays you whatever remains between the amount you were advanced and the full invoice amount —minus fees.

Accounts receivable factoring example

Here’s what that might look like in practice:

Invoice amount: $10,000.
Advance (90%): $9,000.
Reserve (10%): $1,000.
Fee: 2% of total invoice amount per month it takes your customer to pay.
Customer pays in: Two months.
Final payout from reserve: $1,000 - $400 = $600.
Total amount you receive: $9,600 (96% of invoice).
Factoring company earns: $400.

How much does accounts receivable factoring cost?

Factoring companies usually charge variable rates. The longer your customers take to pay the invoice, the more you’ll owe. Fees typically range from 1% to 5% of the invoice value.

For example, let’s say:

Your invoice is $50,000.
The factoring fee is 2% per month.

If your customer pays in one month:

2% of $50,000 = $1,000
Total fee: $1,000.

If your customer pays in three months:

2% x 3 months = 6% total.
6% of $50,000 = $3,000.
Total fee: $3,000.

The longer it takes your customer to pay, the more you owe. Keep in mind: Some factors charge weekly rates instead of monthly ones.

For instance, let’s say:

The fee is 1% per week.
Your customer pays in four weeks.
1% x four weeks = 4% total.
4% of $50,000 = $2,000.
Total fee: $2,000.

If you’ve agreed to recourse factoring, you’ll be on the hook if your customer doesn’t make payments. However, non-recourse factoring means that the factoring company accepts those potential losses. Non-recourse factoring generally comes with higher costs because the factoring company assumes more risk.

Will I qualify for accounts receivable factoring?

To qualify, you generally need:

Established invoicing practices that give details about sales, prices and payment timelines.
Invoices for completed work, not work in progress.
Customers that are businesses or government agencies, not individual buyers.

Factoring companies may also require:

A certain amount of time in business.
A minimum amount of monthly or annual revenue.

What isn’t as important:

The business owner’s credit score doesn’t determine creditworthiness when factoring receivables, however. Since lenders earn money by recouping payment from businesses’ customers, not businesses themselves, factoring companies focus on the creditworthiness of those customers instead.

This can make factoring a good option for businesses facing credit challenges or startups with short credit histories.

How is factoring receivables different from accounts receivable financing?

The core difference:

Factoring is the sale of unpaid invoices.
Accounts receivable financing (invoice financing) uses unpaid invoices as collateral.

Business owners receive financing based on the value of their accounts receivable. After invoices are paid, businesses pay lenders back, with fees.

Why factoring typically costs more

Factoring is typically more expensive than financing since the factoring company takes responsibility for collecting on the invoice. In the case of non-recourse factoring, they also accept the losses if the invoice goes unpaid.

With accounts receivable financing, on the other hand, business owners retain all those responsibilities.

» MORE: Invoice factoring vs. invoice financing: What’s the difference?

How do I find an accounts receivable factoring company?

You will typically find accounts receivable factoring through specialized companies, like FundThrough or AltLINE. Factoring companies may also specialize in certain geographies or industries, like construction or trucking.

Factoring costs can vary significantly, so reach out to multiple companies for a quote. After approval, many factoring companies can provide financing within a matter of days.

Once you develop a relationship with a factoring company, you can return to them again and again. However, the factoring company will evaluate each of your customers for creditworthiness before deciding whether to factor those invoices.

» MORE: Compare the best factoring companies

Is accounts receivable financing a good idea?

Factoring receivables can be a great way to cover gaps in your business’s cash flow, especially if your personal credit history is preventing you from financing through traditional lenders. However, it can be an expensive type of financing, and your approval is also dependent on the credit history of your customers.

Alternatives to accounts receivable factoring

If factoring receivables isn’t right for you, you might consider:

If you want to meet short-term cash flow needs

Bluevine Bluevine - Line of credit

5.0

NerdWallet rating

Max Loan Amount

$200,000

Read Review

Apply Now

with Fundera by NerdWallet

Business lines of credit and credit cards are both revolving, meaning you can draw up to your limit as many times as you need to, as long as you’re paying the balance down. Revolving funding can be a great way to cover cash-flow gaps without the high fees of factoring receivables.

If you’re having trouble qualifying with a traditional lender

OnDeck OnDeck - Online term loan

4.8

NerdWallet rating

Max Loan Amount

$400,000

Read Review

Apply Now

with Fundera by NerdWallet

If you turned to factoring receivables because you couldn’t get approved for funding from your bank, you may consider trying an online lender instead. Online loans typically have less favorable terms than bank loans, but they still may be a better, cheaper long-term solution for your business than factoring.

If you like how factoring receivables functions, but you want more control

Accounts receivable financing functions similarly to accounts receivable factoring, but instead of selling your invoices to a factoring company, they serve as collateral for a cash advance. While this leaves you with the responsibility of collecting payment from your customers, it also allows you to maintain a little more control.

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