How to Use Invoice Factoring for Your Business

What invoice factoring company is right for you?

Do you need cash right now but have customers who won’t pay for goods or services until later? Invoice factoring is one solution to your short-term cash flow issues. With invoice factoring and its closely related counterpart, invoice financing, you can turn your unpaid invoices into fast cash.

Technically, invoice factoring is not a loan. Rather, you sell your invoices at a discount to an invoice factoring company in exchange for a lump sum of cash. The factoring company then owns the invoices and gets paid when it collects from your customers, which typically happens in 30 to 90 days.

Here’s what you need to know about invoice factoring, plus where to find financing.

How invoice factoring works

Let’s say you own a hardware store and sell goods to another business, creating a $10,000 invoice.

This particular company has an agreement to pay off its invoices in 30 days, but you need the cash next week to pay your employees. You’ve got a cash shortfall. You could turn to a traditional bank for a loan, but it likely requires collateral (a physical asset, such as real estate, which can be sold by the lender if you default) and stellar personal credit. Or maybe you qualify but can’t wait several months for the loan to close.

So you turn to an invoice factoring company, and it agrees to buy your invoice for $9,700 in cash — $10,000 minus a 3% factoring fee ($300). The invoice factoring company advances 85% (or $8,245) of the invoice within a few days. The factoring company then collects the invoice when it’s due and advances the remaining balance owed to you ($1,455).

Invoice value$10,000
Initial advance (85%)$8,245
Remaining advance (12%)$1,455
Total received$9,700
Fee (3%)$300

The factoring fee, also known as a discount rate, can run from 1% to 5%, depending on the invoice amount, your sales volume, your customer’s creditworthiness, and whether it’s a recourse or nonrecourse factor, which refers to who is ultimately responsible for an invoice that goes unpaid — your company or the factoring company.

If the contract is a recourse factor and the customer doesn’t pay, you may have to buy back the unpaid receivable from the factoring company or replace it with a more current receivable of equal or greater value. If it’s a nonrecourse factor, you’re under no obligation to repay or replace the unpaid receivables, but you’ll likely be charged a higher transaction fee because the factoring company takes on the added risk of not getting its money back.

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Invoice factoring pros and cons


  • Fast cash: Invoice factoring can provide immediate working capital to help cover a funding gap caused by slow-paying customers.
  • Easier approval: Invoice factoring provides financing to companies that might not be able to get capital from other sources, such as traditional banks, because of a lack of collateral for a loan, poor personal credit or a limited operating history. Invoice factoring companies typically only care about the value of the invoices you are looking to factor, as well as the creditworthiness of the customers.
  • Improved cash flow: You can keep loyal customers on longer payment terms. This feature can improve your cash flow and help you grow your business.


  • Costly: The service can be quite expensive. You have to watch out for hidden fees, such as application fees, a processing fee for each invoice you finance, credit check fees, or overdue fees if your client is past due on a payment, which can bump up the annual percentage rate (the annual cost of borrowing money with all fees and interest included).
  • Loss of direct control: Because the invoice factoring company may collect on the invoices directly, you need to make sure it is ethical and fair when dealing with your customer.
  • Customer’s bad credit could derail your financing: The factoring company may need to verify the creditworthiness of your customer. If the customer has a history of late or missed payments, you may not be approved for the financing.

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Invoice factoring and financing options

Small businesses can turn unpaid invoices into fast cash with invoice factoring and invoice financing companies, including online lenders. The terms, rates, speed of funding and qualifications differ for each lender; we compare them below.

BlueVine offers invoice factoring. The alternative lender advances 85% of your invoice amount upfront and the rest when a customer pays you (which can be anywhere from one to 12 weeks), minus fees of 1% per week. BlueVine’s APR on invoice factoring ranges from 17% to 60%. Note that BlueVine requires you to set up a new bank account and a post office box for your customer’s payments.

  • Loan amount: $20,000 to $2 million.
  • APR: 17% to 60%.
  • Loan term: 1 to 12 weeks
  • Funding time: 1 to 3 days.
  • Read our BlueVine review.
Get started at BlueVine


Before you apply for BlueVine’s invoice factoring, find out whether you meet the minimum qualifications.

  • 530+ personal credit score.
  • 3+ months in business.
  • $120,000+ in annual revenue.
Do I qualify?

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Invoice financing is a bit different from factoring in that you aren’t selling your invoices to a factoring company. Instead, you use the invoices as collateral to obtain a cash advance and are responsible for collecting the invoices yourself.

Fundbox is an invoice financing company that advances 100% of the value of the invoice upfront, and you repay it in 12 equal weekly installments, plus a fee. You can borrow from $500 to $100,000, with funding in one to three business days. It’s a good option if you have bad credit or want to avoid a credit check, or if you need to finance a smaller amount from your invoices.

  • Loan amount: $500 to $100,000.
  • APR: 13% to 68%.
  • Loan term: Equal repayments over a 12-week period.
  • Funding time: 1 to 3 business days.
  • Read our Fundbox review.
Get started at Fundbox


Before you apply for Fundbox’s invoice financing, find out whether you meet the lender’s minimum qualifications.

  • No minimum personal credit score required.
  • No minimum annual revenue required.
  • Must use online accounting software that can link to Fundbox (such as Quickbooks, FreshBooks, Harvest).
Do I qualify?

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Find and compare the best small-business loans

If invoice factoring is not for you, check out other financing options on NerdWallet’s small-business loans page. We gauged lender trustworthiness, market scope and user experience, among other factors, and arranged them by categories that include your revenue and how long you’ve been in business.

Compare business loans

Steve Nicastro is a staff writer at NerdWallet, a personal finance website. Email: Twitter: @StevenNicastro.

Updated Dec. 9, 2016.