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What Is Invoice Factoring – Pros & Cons of Using for Your Small Business


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Some customers take ages to pay their bills. For small-business owners who rely on cash flow, slow-paying customers are a real problem.

You’re making sales, but you don’t have cash in the bank because those sales are tied up in accounts receivable. That makes it difficult to pay your own bills and grow your business.

For some small businesses, invoice factoring can help bridge the gap between sales and receivables and ensure they have the funds to continue to function and grow.

What Is Invoice Factoring?

Invoice factoring goes by several names: receivables financing, accounting receivables factoring, or invoice financing. Whatever you call it, invoice factoring allows a business to sell its receivables to a factoring company in exchange for immediate cash.

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Unlike other financing options, such as small-business loans or credit cards, invoice factoring isn’t based on the business or business owner’s creditworthiness.

Instead, factoring terms are based on the customer’s credit. That makes it more accessible to new companies without any credit history and established businesses with bad credit.

The process is relatively straightforward. After you deliver a product or service to your customer, you send a copy of the invoice to an invoice factoring company. Within a short period of time, the factoring company provides an immediate cash advance — usually between 60% and 90% of the invoice total.

\Customers then send payments directly to the factoring company. After the factoring company collects the payment from your customer, they pay you the balance of your invoice, minus an agreed-upon fee.

Invoice factoring can be used to streamline cash flow for a small business and minimize problems caused by slow-paying customers without taking on additional debt.

Recourse vs. Non-Recourse Invoice Factoring

There are two basic types of invoice factoring.

  • Recourse Factoring. With recourse factoring, if your customer doesn’t pay the invoice, you will either owe money back to the factoring company or have to offset the debt with another invoice.
  • Non-Recourse Factoring. With non-recourse factoring, the factoring company evaluates your customer’s creditworthiness and agrees to take the loss if your customer doesn’t pay the invoice due to insolvency. For example, if the customer goes bankrupt or closes during the factoring period — usually 90 days — the factoring company loses money. However, if the customer refuses to pay the invoice for other reasons, such as a dispute over the order or a delivery issue, you have to pay the factoring company back for that invoice.

Recourse factoring typically costs less than non-recourse factoring because your business still shoulders the risk if the customer doesn’t pay; the factoring company doesn’t take on that risk.

Invoice Factoring vs. Small-Business Loan

Typically, getting approved for a small-business loan requires jumping through a lot of hoops. Depending on the lender, you may need to provide financial statements and projections, bank statements, business tax returns, a written business plan, and copies of any leases and business licenses.

The lender will pull credit scores for both the business and its owners, and may even require you to put up collateral such as business equipment, inventory, or personal assets.

The application and approval process can take anywhere from 30 to 120 days. Plus, there’s always a possibility that the lender will deny your application. If your small business needs funding now, waiting for approval on a bank loan may not be an option.

By comparison, invoicing factoring makes it easy to access money because you’re simply getting instant access to cash that customers already owe you. This helps you get paid quickly and consistently.

Pros and Cons of Invoice Factoring

Is invoice factoring for you? Consider these pros and cons when making your decision.


The biggest benefit of invoice factoring is that your business receives the money it’s owed without having to wait 30, 60, 90, or 120 days for customers to pay. Other advantages include:

  1. Flexibility. Businesses of all sizes and in all industries can use invoice factoring. Factoring also allows the business to use the funds for any purpose: hiring new employees, investing in marketing and advertising, or just supporting day-to-day operations. Loans, on the other hand, often limit the use of proceeds to a specific purpose, such as purchasing equipment.
  2. Fast Turnaround. Getting a small-business loan can take weeks or even months. Invoice factoring can provide cash in a matter of days. Once your application is complete and the factoring company verifies your invoices, you can receive the funds via direct deposit into your bank account.
  3. Easy to Qualify. Invoice factoring doesn’t require additional collateral from your business or personal assets, so you don’t need to put your home, vehicles, inventory, or other assets on the line. Also, since invoice factoring doesn’t rely on your personal credit score or business credit rating, it’s available to business owners who may have had credit troubles in the past.
  4. Saves Time. Small-business owners and their employees can spend a lot of time chasing down receivables. When you work with a factoring company, their team takes over handling payments and managing collection calls. This allows you to spend more time being productive and building your business.
  5. Tax-Deductible Fees. With invoice factoring, you pay for convenience. That fee depends on several factors, including the credit risk of your customers and how long they typically take to pay. However, it typically runs somewhere between 1% to 5% of the total invoice amount. The good news is the fee is a tax-deductible business expense.


Despite the advantages, invoice factoring can also come with some financial and operational drawbacks.

  1. More Expensive. In many cases, invoice factoring is more expensive than a traditional loan or line of credit. However, if poor credit makes those funding options impossible for you, invoice factoring is typically less expensive than payday loans or credit card cash advances. Just keep in mind that if your customers have a history of slow payments and financial problems, this will impact the rate you’ll pay to factor the invoice.
  2. Weakened Customer Relationships. When you factor invoices, your customers must make payments directly to the factoring company. Turning accounts receivable collection over to a third party can negatively impact your customer relationships if the invoice factoring company’s employees aren’t as professional and courteous toward your customers as you would be in asking for payments.
  3. Risk of Unpaid Invoices. Remember that you may still be responsible for unpaid invoices. If you have a recourse factoring arrangement and your customers don’t pay, you’ll have to repay the factoring company or offset the payment with a new invoice.

Companies That Offer Invoice Factoring

If you’ve decided getting immediate cash is worth the cost and risks, there are several invoice factoring companies to choose from. Here are a few options:

1. BlueVine

BlueVine advertises that small-business owners can apply for invoice factoring in less than 10 minutes by providing some basic information about your business and its customers.

BlueVine then reviews your application and returns a decision on your application in as little as 24 hours. They provide 85% to 90% of the invoice amount upfront, and you’ll receive the rest — minus BlueVine’s fee — once your customer pays the invoice.

BlueVine’s minimum qualifications are:

  • A FICO score of 530 or higher
  • Being in business for more than three months
  • $10,000 in monthly revenue

BlueVine only works with business-to-business organizations.

2. Triumph Business Capital

Triumph Business Capital takes applications online or by phone. Triumph also asks for a copy of your company’s current accounts receivable aging report, articles of incorporation or other organizational documents, and a sample invoice. The company processes your application within 24 hours.

Triumph Business Capital works specifically with:

  • Trucking companies
  • Freight brokers
  • Staffing companies
  • Government contractors
  • Small- to medium-sized businesses

3. Paragon Financial Group

Paragon Financial Group accepts applications online and can provide cash for 80% to 90% of the invoice amount within 24 to 48 hours.

They only work with:

  • Businesses whose clients are other businesses or governments with excellent credit
  • Companies with sales of $30,000 to $10 million per month

Final Word

Invoice factoring can be an excellent option for some small businesses. However, if your company needs to fund growth, it’s a good idea to compare the cost of invoice factoring to small-business loans and lines of credit.

With invoice factoring, you can get easy access to financing without restrictions on how you spend the money. However, it can be more expensive than other borrowing options. If it is, you have to decide whether that convenience is worth the additional cost.


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Janet Berry-Johnson is a Certified Public Accountant. Before leaving the accounting world to focus on freelance writing, she specialized in income tax consulting and compliance for individuals and small businesses. She lives in Omaha, Nebraska with her husband and son and their rescue dog, Dexter.