Waiting 30, 60, or even 90 days for customer payments can leave your business scrambling to cover payroll, purchase inventory, or pay suppliers. Outstanding invoices represent money you've already earned but can't access when you need it most.

Invoice factoring offers a solution by letting you sell your unpaid invoices to a third-party company at a discount. In exchange, you receive immediate cash, typically within 24 to 48 hours, giving you the working capital to keep operations running smoothly without taking on debt.

What is invoice factoring?

Invoice factoring is a form of financing where you sell your outstanding invoices to a third-party factoring company for immediate cash. Instead of waiting weeks or months for customers to pay, you receive most of the invoice value up front, usually 80%–90%, within a day or two.

Here's how it works in practice. Say you invoice a client $10,000 with net 60 payment terms. A factor might advance you $8,500 immediately (85% of the invoice value). When your client pays the full $10,000, the factor keeps their fee and sends you the remaining balance, known as the reserve amount.

Factoring comes in two main types: recourse and non-recourse. With recourse factoring, you're responsible if your customer doesn't pay. Non-recourse factoring transfers that risk to the factor, though it usually costs more because the factor assumes the credit risk.

The U.S. factoring services market was valued at $171.98 billion in 2024 and is projected to grow at a compound annual growth rate (CAGR) of 9.4% from 2025 to 2030, reflecting its increasing adoption across industries.

How does invoice factoring work?

The invoice factoring process follows a straightforward four-step cycle that typically completes within a few business days.

Step 1: Submit your invoice

You’ll submit your unpaid invoice along with supporting documents such as purchase orders, delivery receipts, or contracts. The factor reviews your customer’s creditworthiness, since they’re ultimately responsible for payment. Most factors approve applications within 24 hours.

Step 2: Receive your advance

Once approved, the factor advances you 80%–90% of the invoice value. The exact percentage depends on your industry, invoice size, and customer payment history. You’ll usually receive funds via wire transfer or ACH deposit within 24–48 hours.

Step 3: Customer pays the factor

The factor notifies your customer that the invoice has been assigned to them and provides new payment instructions. Your customer then pays the factor directly according to the original payment terms. Many factors manage collections professionally and maintain positive customer relationships.

Step 4: Receive the remaining balance

After your customer pays the full invoice amount, the factor deducts their fee and releases the remaining balance. This reserve amount usually ranges from 10–20% of the invoice value. Fees typically range from 1–5% and are based on how long it takes your customer to pay.

Invoice factoring vs. invoice financing

Invoice factoring and invoice financing both provide quick access to cash from unpaid invoices, but they work differently. With factoring, you sell your invoices to a third party who takes ownership and collects payment directly from your customers. With invoice financing, you borrow money using those invoices as collateral while retaining ownership and responsibility for collections.

The ownership and collection differences affect how each option impacts your accounts receivable. Factoring removes the invoices from your books because the factor owns them, while financing keeps them on your balance sheet as an asset and adds a loan liability.

Factoring works well if you want to outsource collections or lack the resources to chase payments. Financing suits businesses that want to maintain direct customer relationships and have reliable collection processes.

Types of invoice factoring

Invoice factoring comes in several forms, each with different risk levels, costs, and flexibility to match your business needs.

Recourse factoring

Recourse factoring is the most common type. You sell your invoices to a factor but remain responsible if your customer fails to pay. If the invoice goes unpaid after a set period, typically 90 days, you must buy it back or replace it with another invoice. Costs are generally lower because the factor takes on less risk.

Non-recourse factoring

With non-recourse factoring, the factor assumes the credit risk if your customer becomes insolvent. This option usually costs more, and coverage often applies only to credit-related nonpayment, not disputes or slow payers.

Spot factoring

Spot factoring allows you to sell individual invoices rather than committing to factoring your full ledger. It offers flexibility for businesses with occasional cash flow gaps, though rates may be higher because the factor can’t rely on consistent volume.

Pros and cons of invoice factoring

Before choosing invoice factoring, there are some advantages and disadvantages you may want to consider.

Pros

• Immediate improvement to cash flow
• No debt added to your balance sheet
• Faster funding than a traditional business line of credit
• Outsourced collections that reduce administrative work
• Scales with your revenue as your invoice volume grows
• No collateral required beyond the invoices you sell

Cons

• Fees can add up, especially if customers take longer than expected to pay
• Customers interact directly with the factor, which may affect your relationships
• Not all industries, invoice types, or customers qualify for factoring
• Your business may become dependent on factoring for ongoing cash flow
• You give up control over the collections process

Invoice factoring costs and fees

Understanding factoring costs helps you evaluate whether this financing option makes sense for your business.

Factor rates and discount fees

Factor rates typically range from 1–5% of your invoice value. The exact rate depends on your invoice size, customer creditworthiness, payment terms, the factoring type, and your sales volume with the factoring company. Some factors charge a flat rate based on the invoice amount, while others use a time-based model where fees increase the longer your customer takes to pay. Time-based pricing might start at 1% for the first 30 days, then add 0.5% for each additional week. This structure incentivizes faster customer payments and can cost more if your clients consistently pay late.

Additional fees to consider

Beyond the basic discount rate, factors may charge various fees that can significantly affect your total costs:

• Application or setup fees: One-time charges ranging from $100–500 to establish your account and review your invoices
• ACH or wire transfer fees: Charges of $10–50 per transaction to send your advance payment
• Monthly minimums: Required minimum factoring volume, often $10,000–50,000, with penalties if you don't meet the threshold
• Late payment fees: Additional charges when your customers exceed the agreed payment window, typically 1–2% of the invoice value

Here's a cost example for a $10,000 invoice with 30-day payment terms. You receive an 85% advance ($8,500) up front. The factor charges a 3% fee ($300) and a $25 wire fee. When your customer pays, you receive $1,175 ($10,000 – $8,500 – $300 – $25).

Who should consider invoice factoring?

Invoice factoring is common in industries where long payment terms create cash flow gaps, such as trucking, staffing, construction, and manufacturing. It can also support businesses that are growing quickly and need capital to keep up with demand.

You may benefit from factoring if:

• You work with creditworthy customers who pay slowly
• You need fast access to cash without taking on debt
• You prefer to outsource collections to save time
• Your business is newer or has limited credit history

Factoring may be less suitable if your margins are thin or if your customer relationships depend on managing payments directly.

How to choose an invoice factoring company

Choosing the right factoring partner can meaningfully affect your costs, customer experience, and access to capital. As you compare options, pay close attention to the structure of the contract and the factor’s approach to working with your customers.

Key factors to evaluate include:

• Advance rates and reserve requirements
• Total fee structure beyond the headline rate
• Contract length, notice periods, and termination fees
• Whether they offer recourse, non-recourse, or both
• Funding speed and available payment methods
• Customer service quality and collections approach

Questions to ask include how disputes are handled, whether rates increase over time, and how the factor communicates with your customers throughout the collections process.

Invoice factoring alternatives

Understandably, you may have reservations about giving your aged receivables to a third party or paying the invoice factoring rates some providers require. You may also feel as though you have little choice when you’re faced with significant expenses. But there are other options. Invoice factoring is only one of several ways to get cash flow support for your business:

Other options include:

• Standard bank loans: Borrow a fixed amount and repay it over a set term, but approvals can take weeks and require strong financial documentation
• Working capital loans: Short-term financing to cover operating expenses like payroll, inventory, or marketing
• Business line of credit (LOC): Flexible access to funds for short-term cash flow needs, subject to lender approval
• Business credit card: Useful for everyday expenses, though high interest rates make them less suitable for long-term financing
• Asset-based lending: A revolving credit line secured by assets such as receivables, inventory, or equipment, with borrowing capacity tied to collateral value
• Merchant cash advances: Fast funding repaid through a share of daily revenue, but often one of the most expensive forms of financing

These alternatives won’t suit every business, especially if you’re trying to balance fast access to cash with maintaining control over accounts receivable.

Use Ramp to automate bookkeeping

Accounting automation is just one part of finance automation. It can do away with tedious, repetitive accounting tasks and allow your staff to prioritize communication, management, accounting, and strategizing.

Ramp is a solution for finance and accounting teams that does just that. Ramp’s expense management software can help you handle your business finances and bookkeeping with best-in-class integrations for today's most popular accounting tools, including QuickBooks, Xero, NetSuite, and Sage Intacct.

Try Ramp to see for yourself how much time and money you can save.

You can learn more about Ramp Bill Pay and how it helps automate accounts payable at our official page: https://ramp.com/accounts-payable