Introduction to Invoice Factoring: Everything You Need to Know About How It Works

If your business invoices customers on credit terms and waits weeks or months for payment, invoice factoring can unlock immediate cash without new debt or equity dilution. In this article, we explain what invoice factoring is, how it works, who qualifies, what it costs, and the steps to secure a facility that fits your operations.

What Is Invoice Factoring

Invoice factoring is a financing method where a company sells its accounts receivable to a finance partner for an upfront payment. Instead of waiting 30 to 90 days for customers to pay, the business receives cash immediately—usually 70 to 90 percent of the invoice value—while the balance is released when customers settle. The factor earns a fee for providing this liquidity and managing collection risk.

How Invoice Factoring Works

1. Invoice submission: The business uploads invoices that meet eligibility criteria—valid purchase orders, proof of delivery, and no disputes.
2. Advance funding: The factoring company advances 70 to 90 percent of the invoice value, usually within a few days.
3. Customer payment: The customer pays the invoice into a designated account under disclosed or confidential terms.
4. Balance release: Once payment clears, the remaining amount—less discount and service fees—is released to the business.

Understanding the Costs

Factoring costs vary depending on invoice size, payment terms, customer credit quality, and whether the facility is recourse or non recourse. The main costs include a discount fee (interest-like cost) and a service fee. Transparent providers will show the effective annualized rate so you can compare it with bank alternatives.

Recourse vs Non Recourse Factoring

Under recourse factoring, your business remains responsible if a customer fails to pay after a defined period. Non recourse factoring transfers approved debtor default risk to the finance partner, often supported by credit insurance. While safer, non recourse programs carry higher fees and may only cover select debtors.

Who Qualifies for Invoice Factoring

• Companies that invoice other businesses (B2B or B2G) with verifiable delivery records.
• Minimum monthly invoice volume of around 100,000 USD or equivalent.
• Customers with consistent payment history and creditworthy profiles.
• Invoices that are due within 30 to 90 days and not encumbered by other pledges.

Key Advantages of Factoring

• Immediate cash flow without increasing balance sheet debt.
• Improved liquidity to fund payroll, raw materials, or growth initiatives.
• Professional credit control and collections support from the factor.
• Scales naturally with sales volume and customer growth.

Common Risks and How to Avoid Them

• Hidden fees or long lock-in periods—always read the fee schedule carefully.
• Loss of customer control in disclosed factoring—choose confidential programs if required.
• Eligibility issues due to disputes, poor documentation, or related party sales.
• Overreliance on one large customer without diversification or credit insurance.

The 4-Step Process With Financely

1. Submit RFQ: Share AR aging, top customers, and sample invoices for preliminary review.
2. Receive Term Sheet: Get advance rates, fees, and eligibility criteria in writing.
3. Activate Facility: Upload data, sign documents, and select eligible invoices.
4. Get Funded: Receive your advance and track headroom in your dashboard.

Frequently Asked Questions

Financely coordinates invoice factoring through regulated partners. We are not a lender and do not purchase receivables ourselves. All facilities are subject to KYC, AML, sanctions screening, eligibility tests, assignment rules, and counterparty approvals. Advance rates and pricing depend on client data quality, obligor strength, and jurisdiction.