Invoice factoring is the sale of an unpaid invoice at a discount. A factoring company (the factor) buys your receivable, pays you most of its value within about 24–48 hours, collects the full amount from your customer when the invoice comes due, and then releases the rest to you minus its fee. You are not borrowing — you are selling an asset. Some explainers mislabel factoring “a short-term loan” (Adobe’s factoring page does this in its intro); that framing is wrong, and the difference matters for your balance sheet, your customer relationship and what happens if the customer never pays.
General information, not financial advice.
Say you factor a $20,000 invoice at an 85% advance and a 2%-per-30-days fee, and your customer pays on day 30:
| Invoice face value | $20,000 |
| Advance (85%), in your account ~day 1 | $17,000 |
| Reserve held by the factor | $3,000 |
| Factor fee (2% of face value) | −$400 |
| Reserve released when the customer pays | $2,600 |
| Total you receive | $19,600 |
Note the fee base: 2% of the $20,000 face value — not 2% of the $17,000 you advanced. If the same customer pays on day 60 under a per-30-day fee, the fee becomes two periods (4% = $800), the release drops to $2,200, and you keep $19,200. How fast your customer pays is a cost lever, which is why the costs guide prices one invoice at 30, 60 and 90 days. Run your own numbers in the factoring calculator.
Recourse vs non-recourse — who eats a non-payment? Under recourse factoring, if the customer doesn’t pay within the agreed window (typically 60–90 days), you buy the invoice back or replace it with a fresh one (RTS factoring guides; Invoiced). Under non-recourse, the factor absorbs the loss — but only for the approved reason: the debtor’s insolvency or bankruptcy on an invoice the factor approved. A disputed invoice is never covered, even on a non-recourse agreement (Commercial Capital; RTS; Gateway CF) — see the reality test on the choosing page.
Notification vs non-notification — does your customer know? Notification is the default: the customer is told the invoice was sold and pays the factor. Non-notification (sometimes called confidential) factoring keeps the arrangement hidden — payments route through a lockbox or an account in your name — and it costs more (Wise; CFI; BlueVine).
Spot vs contract — one invoice or the whole ledger? Spot factoring sells a single invoice or small batch with no ongoing commitment: more flexible, priced higher per invoice. Contract (whole-ledger) factoring commits your receivables flow for a term, usually at better pricing and often with monthly minimums. One vendor (Gateway CF) publishes spot minimums around $100,000 with 5–10% fees — that is that vendor’s own terms, not a market rule.
Flat vs tiered fees — how time is charged. A flat fee is one percentage regardless of how long the customer takes. A tiered (per-period) fee steps up the longer the invoice stays unpaid — e.g., 2% for the first 30 days, then 0.5% per additional 10 days (NetSuite’s example). The shapes price identically at 30 days and very differently at 90; the costs guide ladders all three on one invoice.
Because factoring is a sale, the advance does not appear as debt on your balance sheet — the receivable leaves your books and is replaced by cash plus a reserve asset. Xero’s accountant guide flags exactly this contrast: invoice financing records a short-term liability, factoring does not. Practically, that means factoring does not consume borrowing capacity the way a loan does — but it also means there is no lender-of-record protections framework around it; the contract is the whole deal, which is why the contract-trap checklist exists.
Factoring in your industry looks different in the details — trucking prices the broker’s credit, staffing is about weekly payroll, and construction has retainage friction the generic guides skip.
Is invoice factoring a loan? No. Factoring is a sale: the factor buys your receivable at a discount and owns the right to collect it. No debt is created and nothing is repaid — which is also why Adobe’s “short-term loan” label is misleading. Borrowing against invoices is the other product, invoice financing (NerdWallet; NetSuite; Xero).
How does invoice factoring work? You sell an invoice for completed B2B work; the factor verifies it and advances typically 80–90% of face value within about 24–48 hours; the factor collects from your customer under a notice of assignment; when paid, it releases the reserve minus its fee (Xero; QuickBooks). The worked example above shows the full arithmetic on a $20,000 invoice.
What percentage do factoring companies take? The fee is typically 1–5% of the invoice’s face value per 30 days (LendingTree; NetSuite frames it at 2–5%), deducted from the reserve — and the advance they pay up front is a separate percentage, usually 70–90% of face. Confusing the two percentages is the most common quoting trick; the costs guide separates them with numbers.
Do my customers know if I factor their invoices? Under standard (notification) factoring, yes — they receive a notice of assignment and pay the factor directly. Non-notification structures exist that keep it confidential, at a higher price (Stripe’s comparison; BlueVine; Wise). In practice many customers of larger suppliers already pay factors routinely; it is a normal B2B arrangement.
What happens if my customer doesn’t pay the factoring company? It depends on your recourse terms. With recourse factoring, after the agreed window (typically 60–90 days) you buy the invoice back or swap in a replacement, and collection becomes your problem again. With non-recourse, the factor absorbs the loss only if the customer became insolvent on an approved invoice — a dispute over the work is never the factor’s loss (Invoiced; RTS).
Sources: NerdWallet factoring guide; QuickBooks, Xero, NetSuite and Invoiced factoring explainers; FreshBooks (lockbox); RTS and Commercial Capital (recourse terms); LendingTree factoring roundup; Wise and CFI (spot and non-notification). Currency verified 2026-10-23.