Slow-paying customers, seasonal demand, or rapid growth can tie up cash in accounts receivable. Invoice Financing / Factoring offers a way to unlock that working capital by converting unpaid invoices into immediate cash. This guide explains how invoice financing works, the pros and cons, typical costs, eligibility factors, and practical steps U.S. businesses can take to evaluate and apply for receivables financing.
What is Invoice Financing / Factoring?
Invoice Financing / Factoring is a funding option that uses outstanding invoices (accounts receivable) as the basis for credit. There are two closely related approaches:
- Invoice Financing (Receivables Financing) — A business borrows against unpaid invoices, creating a collateralized loan or line of credit where invoices back the borrowing.
- Factoring — A business sells individual invoices or a portfolio of invoices to a factoring company (factor) at a discount in exchange for immediate cash.
Both approaches accelerate cash flow, but the structure and implications — such as control over collections, pricing, and risk — differ.
Common terms you’ll see
- Advance rate — The percentage of the invoice value provided up front (commonly 70%–90%).
- Discount rate / factoring fee — The fee charged by the factor, often expressed as a percentage of invoice value or as a monthly rate.
- Recourse vs non-recourse — Whether the business retains liability if a customer fails to pay.
- Holdback / reserve — Amount retained until the invoice is paid to cover fees and chargebacks.