Invoice Factoring for Small Business

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Invoice Factoring

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If you’re in a business where you have to invoice your clients for large amounts, you may have found yourself low on cash while you wait for them to pay. This can cause your business serious problems, making it difficult to purchase materials for your next job, grow your business, or simply cover payroll. When it’s not possible to reduce your payment terms, you may need to look into invoice factoring to allow you to access the funds you need.

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What is invoice factoring?

Invoice factoring is a way to get your invoices paid early by a third-party company.

How does invoice factoring work?

Imagine you are a construction company that has recently completed a renovation for another large company that has a net 60-day payment policy. This invoice is for 50% of the project, so a significant amount, and you need the cash to start your next project.

You don’t want (or can’t) wait for them to pay, so you “sell” the invoice to an invoice factoring company. The invoice factoring company “buys” the invoice from you (usually for a percentage of the full invoice amount) and you can move on with your business. They collect the payment from the company you invoiced.

Featured Invoice factoring options

FundBox Business Loans


Funding: Borrow $2,500 - $150,000
Minimum Credit Score: 600
Loan term: 12-24 months
Funding turnaround: as fast as next business day

Fundbox requires minimal documentation and access to a revolving line of credit without origination or maintenance fees. Borrowers are not required to have collateral (with exception of larger credit lines which are subject to a personal guarantee).



Funding: Borrow $5,000 - $250,000
Minimum Credit Score: 600
Loan term: 6-12 months
Funding turnaround: 24-48 hours

With BlueVine, borrowers can get approval as fast as 24 hours and obtain a business line of credit for short term capital needs while only paying interest on the funds you borrow.


What type of companies use invoice factoring?

Any company that invoices their customers on net-30 or net-60 day terms is eligible, especially if they work with medium and large-sized companies, but it lends itself better to some industries than others. Companies that often use invoice factoring are:

  • Trucking and freight companies
  • Construction companies
  • IT companies
  • Staffing agencies & security guard services
  • Wholesale companies

Is invoice factoring a loan?

No. You are essentially “selling” the money you’ll get in the future, though you do pay for the pleasure. So, instead of getting 100% of the invoice amount from your client in 60 days’ time, you’ll get 95% of it (though your percentage may be more or less than this).

If your client didn’t pay the invoice, you would have washed your hands of the situation and it would be up to the invoice factoring company to chase the client for the money.

What are the different types of invoice factoring?

There aren’t really different types of invoice factoring, just different names for it. You may see invoice factoring called:

  • Debt factoring
  • Accounts receivable factoring
  • Invoice discounting

What are the pros & cons of invoice factoring?


  • It’s easy to get approved for invoice factoring because you aren’t asking for a loan or relying on your credit score to get the money you need
  • Approval is typically very fast, especially if it’s a company you work with often
  • You don’t need to offer up any collateral, since the invoice itself is worth the money you’re accessing
  • You get paid on your terms, rather than waiting for another company’s finance department to get around to it


  • You often lose your profit margin, because you likely didn’t add 1-5% of costs onto the invoice to allow for invoice factoring fees, so you may find you make very little on the job overall
  • Invoice factoring companies only work for those who invoice their clients
  • You essentially wash your hands of the client, which may turn them off from working with you again in the future
  • You need to make sure you’re not working with recourse factoring service, or you’ll have to buy back the invoice if your client tries to avoid paying

What are the costs associated with invoice factoring?

In most cases, the invoice factoring company will charge you 1-5% of the invoice total. For example, if your invoice was for $100,000 and the charge was 5%, you would get paid $95,000.

Generally, the costs are based on the terms of the invoice (how long the company may need to wait to be paid by your client) and how likely they are to pay. For example, if the company you did work for was McDonald’s, you’d likely get charged less because it’s highly likely you’ll get paid. However, if they’re a smaller company that is unknown, you might find yourself with higher fees.

Something you need to be aware of is that this charge will usually build month-on-month. So, if you sell an invoice for a company you’re worried will disappear and they do, you may find yourself getting charged as the invoice factoring company struggles to get their money. Make sure you read the terms carefully before you sell an invoice so you know how much you can be charged if your client tries to avoid payment.

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

Invoice financing is like invoice factoring, but you borrow the money from the invoice financing company and pay them back when your client pays you. The benefit of this is you retain control of the invoice instead of handing it over entirely to another company, so it’s often a better option if you plan to work with the client in the future and want to ensure you keep control of the customer experience.

The fees for invoice financing are usually lower (1-3%), but unlike invoice factoring, you are borrowing money so you’ll be subject to a credit check. You’ll also be responsible for paying back the company whether your client pays you or not, so you need to be sure they’re not going to refuse to pay or you may find yourself in financial difficulty.

What are the requirements to qualify for invoice factoring?

In most cases, an invoice factoring company will not simply purchase a single invoice from you, you’ll need to enter into a contract with them so you can work with them on an ongoing basis. To qualify for invoice factoring services, you’ll need:

  • The invoice to be worth at least the minimum amount the factoring company will purchase, this varies from company to company, but most are $5,000 or more
  • You must be B2B (serve other businesses) and serve multiple customers
  • Your invoice terms must meet industry standards (such as net-30 or net-60)
  • Must demonstrate that the debt can be collected (this is why it’s so much easier to use invoice factoring for invoices you’ve given to established medium and large companies)
  • A minimum turnover of at least $100,000
  • Some companies will also have a minimum number of invoices you send out each month

Of course, invoice factoring companies have different requirements and processes, so make sure you do your research.

Is invoice factoring right for your business?

Invoice factoring may be right for you if:

  • You invoice for large amounts regularly
  • You work with medium and large businesses regularly
  • You offer net-30 or more terms as is the industry standard
  • You often find yourself wanting for cash before your client pays
  • You often have to swallow the costs of your next project before you’re paid for your last
  • You generally work on one-time projects so selling the invoice won’t burn a bridge you wish you’d kept

Where to apply for invoice factoring

Do your research into what invoice factoring companies work with your industry and/or location and read the terms of their contract before applying. Make sure you understand what you’ll be charged and when so you won’t get any nasty surprises if your client doesn’t pay them when expected.

Compare rates from multiple invoice factoring companies and find the option that’s right for you and apply. You’ll soon find a partner you can work with to help ensure you never have to deal with cash flow problems.

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