Invoice factoring is the sale of an unpaid business-to-business invoice to a factoring company, called the factor, for cash now instead of cash in 30–90 days. The factor advances a large share of the invoice’s face value up front, holds the rest as a reserve, and releases that reserve when your customer pays, minus the factor’s fee. It is a sale, not a loan, and your customer pays the factor directly.
What invoice factoring is (and why it isn’t a loan)
Factoring is a sale. You did the work, you sent the invoice, and instead of holding that invoice for 30, 60, or 90 days you sell it to a factor at a discount. NerdWallet’s explainer makes the same point plainly: you are selling the invoice itself, not borrowing against it. There is no loan balance on your books, no fixed payment schedule, and the money that comes back to you is your own receivable arriving early with a slice taken out.
The invoice was always going to turn into cash. Factoring changes when. That matters most for businesses whose bills don’t wait: payroll on Friday, fuel on Monday, rent on the first. The Federal Reserve Banks’ 2025 Report on Employer Firms, drawn from the 2024 Small Business Credit Survey, found that 51% of small employer firms named uneven cash flows as a financial challenge in the prior year, and 56% named paying operating expenses. Waiting on invoices is one of the plainest ways cash flow gets uneven.
The three moving parts: advance, reserve, and fee
Every factoring arrangement has three pieces, and once you can name them the whole thing is simple.
The advance is the money you get up front, typically a large share of the invoice’s face value. Bankrate’s explainer puts common advances between 70 and 90 percent of the invoice, and NerdWallet describes advances of up to 90%. The exact share depends on the file: the invoice size, your customer’s payment record, and how long they usually take to pay.
The reserve is the part held back. It sits with the factor until your customer pays the invoice in full. It comes back to you, but only after the customer pays and only after the fee comes out.
The fee is the factor’s charge, taken out of the reserve before the reserve is released. Fees are usually priced by time, so an invoice that stays open longer costs more than one that pays fast. NerdWallet’s explainer describes fees that often run at a flat rate of 1% to 5% of the invoice value per month, sometimes with service, minimum, or origination fees on top. Read the fee schedule line by line before you sign anything; the headline rate is rarely the whole cost.
One invoice, walked through
The numbers below are made up to show the math — they are not Aglet’s pricing and not an offer. Say you send a customer a $10,000 invoice on net-45 terms and sell it to a factor that advances 80%. You receive $8,000 up front. The factor holds $2,000 in reserve. Forty-five days later your customer pays the factor the full $10,000. The fee for that period works out to $300, so the factor releases the remaining $1,700 to you. In total you received $9,700 on a $10,000 invoice, and you had most of it six weeks early. If the customer had taken 75 days instead, the fee would be larger and the release smaller.
Recourse, non-recourse, and who your customer pays
Under recourse factoring you carry the loss if your customer never pays; under non-recourse the factor carries it; and in either case your customer is told to pay the factor.
Recourse or non-recourse
Recourse factoring means you remain responsible if your customer fails to pay; you buy the invoice back or replace it with another. Non-recourse factoring means the factor takes that loss. NerdWallet’s comparison notes that recourse is far more common, and that non-recourse costs more because the factor carries more risk, which shows up as lower advances and higher fees. It also warns that some non-recourse agreements only cover specific events, such as a customer closing or filing for bankruptcy, so a disputed invoice or a slow payer may still be your problem. If a contract says “non-recourse,” ask exactly which situations it covers and get the answer in writing.
Your customer pays the factor
Yes, your customers will know. In most factoring, the customer is notified that the invoice has been assigned and is asked to pay the factor. Under section 9-406 of the Uniform Commercial Code, as published by Cornell’s Legal Information Institute, an account debtor (your customer) can keep paying you until it receives notice that the receivable has been assigned and that payment should go to the assignee (the factor). After that notice, only paying the factor discharges the bill. Notification is routine in freight, staffing, wholesale, and commercial construction, and a professional factor handles it like the ordinary billing change it is. Still, it is a real cost: another company now sits between you and your customer at the moment money changes hands.
Which invoices qualify, and what the factor actually checks
Factoring fits invoices to business customers for delivered goods or completed work, typically on 30–90 day terms. That sentence carries three tests. The customer is a business, not a consumer; NerdWallet is direct that factoring is not a fit for businesses that sell to consumers without invoicing, and invoices to individual consumers don’t fit factoring at all. The work is finished or the goods are delivered, because a factor is buying a bill that is owed, not a bill that might be owed once a job wraps. And the invoice carries normal commercial terms rather than being months past due already.
What the factor underwrites follows from that. Bankrate’s explainer describes the factor looking at your clients’ creditworthiness rather than your business’s, and NerdWallet says factors prioritize the creditworthiness of your customers. In practice the review desk reads your customer’s payment history, the size and age of the invoice, and how much of your receivables sit with one or two customers, alongside the basics of your own file. That is why a newer business with solid commercial customers can sometimes find a fit in factoring where a term program does not work yet, depending on how the file looks.
The honest tradeoffs, and when a term program fits better
Factoring costs more than waiting if you can afford to wait. The fee comes out of every invoice you factor, so on thin margins it can take a real bite out of a job’s profit. The second tradeoff is the one above: your customers deal with the factor for payment. The third is that factoring only reaches as far as your receivables do. If the squeeze in your cash flow is not sitting in unpaid invoices, factoring cannot touch it.
So factoring tends to win when the money you need is already earned and just slow to arrive: a trucking company waiting on shippers, a staffing agency running payroll against invoices that pay next month, a wholesaler selling on net terms. It tends to lose when the need is equipment, a seasonal dip, a build-out, or anything that is not tied to a specific invoice. There a working capital or term program is the cleaner tool: general-purpose capital repaid on a schedule you see before signing, sized on your own file rather than your customers’. And if what you want is a cushion you can draw on and repay as invoices land, a business line of credit may fit better than selling the invoices at all.
| Invoice factoring | Working-capital / term program | Line of credit | |
|---|---|---|---|
| What it is based on | A specific business-to-business invoice and your customer’s payment record | Your own file: time in business, monthly revenue, the health of the file | Your own file; limits typically scale with monthly revenue |
| Who repays | Your customer, by paying the factor; under recourse you carry the loss if they don’t | You, on a schedule spelled out before signing | You, on what you draw; availability typically replenishes as you repay |
| Best for | Cash stuck in receivables from solid commercial customers | A defined need not tied to one invoice: equipment, a job, a slow season | Recurring, uneven needs where you want to draw as needed |
| Watch out for | The fee on every invoice; customers deal with the factor; what “non-recourse” really covers | A fixed payment that runs whether the month is strong or slow | Easy draws becoming a habit; revolving convenience typically prices above a fixed bank line |
Where Aglet fits
Our invoice factoring program works the way this guide describes: invoices to business customers for delivered goods or completed work, typically on 30–90 day terms, with the advance, the reserve, and the fee shown in plain terms before you sign anything. If your cash problem is not sitting in receivables, we will say so and point you to working capital or revenue-based financing instead.
We’re not the cheapest desk. Files that fit usually leave with a longer term and one payment instead of three — and you’ll know exactly what it costs before you sign anything. If your bank can fund the file in time, take it. If it can’t, two minutes and no documents will show you which of our programs, if any, typically reach a file shaped like yours. Every figure on this page is an illustrative range, not an offer; what your invoices actually support is the review desk’s answer.
Sources
- NerdWallet, Invoice Factoring: What It Is and How It Works (Randa Kriss, Oct. 2025) — factoring is a sale of invoices, not a loan; advances of up to 90%; fees often a flat 1% to 5% of invoice value per month; factors prioritize the customer’s creditworthiness; not a fit for businesses that sell to consumers
- NerdWallet, Recourse vs. Non-Recourse Factoring: What’s the Difference? (Randa Kriss, Oct. 2025) — who bears the loss under each structure; recourse is more common; non-recourse carries lower advances and higher fees and may cover only specific events
- Bankrate, What Is Invoice Factoring And How Does It Work? (Emma Woodward, Aug. 2025) — advances of 70 to 90 percent of invoice value; the factor looks at the client’s creditworthiness rather than the business’s; the customer pays the factor directly
- Cornell Legal Information Institute, Uniform Commercial Code section 9-406 (discharge of account debtor; notification of assignment) — an account debtor may keep paying the original creditor until it receives notice of the assignment; after notice, payment to the assignee is what discharges the obligation
- Federal Reserve Banks, 2025 Report on Employer Firms: Findings from the 2024 Small Business Credit Survey — 51% of employer firms cited uneven cash flows and 56% cited paying operating expenses as financial challenges in the prior 12 months