Invoice factoring FAQ
Answers to common questions about how invoice factoring works, what it costs, and what contract terms mean.
What is invoice factoring?
Invoice factoring is a financing arrangement where a business sells its outstanding invoices to a third-party company called a factor. The factor pays the business a large percentage of the invoice value upfront—usually 80 to 95 percent—and then collects payment from the customer. When the customer pays, the factor releases the remaining balance minus its fee.
How is factoring different from a bank loan?
A bank loan provides a lump sum that the business repays over time, usually with interest, using its overall creditworthiness as the basis for approval. Factoring is based on the creditworthiness of the business's customers, not the business itself. Repayment comes from the customer paying the invoice—not from a fixed monthly installment. There is no interest rate in factoring; instead, a discount fee is charged on each invoice.
What is the difference between recourse and non-recourse factoring?
In recourse factoring, the business is responsible for buying back an invoice if the customer does not pay. After a set number of days—commonly 60 to 90—the factor can charge the invoice back to the business. In non-recourse factoring, the factor absorbs certain credit losses if the customer cannot pay due to insolvency. However, non-recourse programs typically exclude losses from disputes, fraud, or other non-credit reasons, so the coverage is narrower than the name suggests.
What fees does factoring involve?
The primary fee is the discount rate or factoring fee, which is charged as a percentage of the invoice face value—commonly 1 to 5 percent depending on the program, invoice volume, and customer credit quality. Additional fees may include wire fees, ACH fees, same-day funding fees, verification fees, and monthly platform or service fees. Minimum monthly fees may also apply if invoice volume falls below a threshold.
What is an advance rate?
The advance rate is the percentage of the invoice value that the factor pays upfront when an invoice is submitted. For example, an 85 percent advance rate on a $10,000 invoice means the factor pays $8,500 immediately. The remaining $1,500 goes into a reserve account and is released—minus fees—after the customer pays.
What is a reserve account?
A reserve account is a holdback that the factor maintains from the invoice value after the initial advance. It protects the factor against invoice disputes, returns, short pays, and other adjustments. Once the customer pays the invoice in full, the factor releases the reserve balance to the business minus any fees and deductions.
What is a notice of assignment?
A notice of assignment is a written communication sent to the business's customers informing them that the invoice has been sold to a factor and that payment should be sent directly to the factor's lockbox rather than to the business. Missing or incorrectly addressed notices of assignment are one of the most common causes of misdirected payments and funding disputes.
What is a UCC-1 filing in factoring?
A UCC-1 financing statement is a public filing that gives notice of a secured party's interest in the business's accounts receivable. When a factoring agreement is signed, the factor files a UCC-1 to perfect its security interest in the receivables. This filing is visible to other lenders and may affect the business's ability to obtain additional financing. The business should confirm the collateral description in the UCC-1 to understand the scope of what is pledged.
How long does it take to get funded after submitting an invoice?
Initial setup—including the application, customer credit checks, and UCC filing—typically takes three to seven business days. Once the account is active, subsequent invoice submissions often fund within 24 hours or even the same business day, depending on the factor and the verification process required for each customer.
Can a startup or new business qualify for factoring?
Yes. Factoring approval focuses primarily on the creditworthiness of the business's customers rather than the business's own financial history. A new business with established commercial clients may qualify when a traditional bank loan is not yet available. The business must be invoicing commercial accounts—factoring does not apply to consumer receivables.
What is a chargeback in factoring?
A chargeback occurs when the factor returns an invoice to the business and requires repurchase. This can happen because the customer did not pay within the recourse period, because the invoice was disputed, because the goods were returned, or because the invoice was ineligible under the terms of the agreement. The chargeback amount is typically deducted from the reserve account or billed directly to the business.
What is a minimum volume requirement in a factoring agreement?
A minimum volume requirement specifies the minimum amount of invoices that must be submitted to the factor each month or quarter. If the business falls below this threshold, a minimum fee—sometimes called a shortfall fee—is charged regardless of actual invoice volume. Minimum volume requirements create a fixed cost obligation during slow periods and should be evaluated carefully before signing a long-term factoring agreement.
What does spot factoring mean?
Spot factoring—also called single-invoice factoring or selective factoring—refers to factoring one invoice or a small batch of invoices without committing to a long-term program. It offers flexibility but often carries higher fees per invoice than a full-program agreement. Not all factoring companies offer spot factoring.
What is an auto-renewal clause in a factoring contract?
An auto-renewal clause automatically extends the factoring agreement for an additional term—often 12 months—unless the business gives written notice of non-renewal before a specified deadline. The notice window is commonly 30 to 90 days before the end of the current term. Missing the deadline can lock the business into another full term with the same termination fee exposure.
What documentation does a business need to start factoring?
Most factoring applications require business formation documents (articles of incorporation or a business license), a voided check for the funding account, a completed credit application, and a list of customers the business intends to factor with their legal entity names. The factor will also request a current accounts receivable aging report. Some factors ask for recent tax returns or bank statements, though underwriting focuses primarily on customer credit rather than the business's own financials.
Can I factor invoices if I already have a bank line of credit?
It depends on whether the bank's line of credit is secured by your accounts receivable. If the bank holds a first-priority lien on receivables—common with asset-based lending facilities—a factoring company cannot take a superior security interest without the bank's written consent. You would need either a formal subordination agreement from the bank or to pay off and terminate the credit line before factoring begins. Some banks have co-lending arrangements that permit both facilities, but this requires explicit coordination.
What happens if my customer disputes an invoice I have already factored?
A dispute on a funded invoice typically triggers a chargeback or recourse event under the factoring agreement. The factor notifies you of the dispute and may place a hold on funding for that customer until resolution. If the dispute results in a credit or invoice reduction, the difference is charged back against your reserve account. You remain responsible for resolving the dispute with your customer. The factoring company does not absorb losses from invoice disputes under most agreements—including those marketed as non-recourse.
How does factoring affect my business credit?
Factoring itself does not typically appear on your business credit report as a loan or liability, since you are selling receivables rather than borrowing. However, the UCC-1 financing statement the factor files is public record and visible to any lender or credit agency that searches the UCC index. Other creditors will see the factor's lien on your receivables when they conduct due diligence, which affects their willingness to extend additional credit secured by the same collateral. This is not a negative mark, but it is information other lenders factor into their decisions.
What is the difference between factoring and purchase order financing?
Factoring funds invoices that represent goods or services already delivered to the customer. Purchase order financing funds the cost of fulfilling an order before delivery, typically by paying a supplier directly on your behalf. The two can sometimes be used in sequence: purchase order financing covers production costs, and once goods are shipped and invoiced, factoring pays off the PO facility and provides the remaining margin. Both involve fees and security interests, but they apply to different points in the cash conversion cycle.
Can I factor invoices from government customers?
Yes, but government accounts have specific procedural requirements. Federal agency receivables are governed by the Assignment of Claims Act, which requires formal written notice to the contracting agency using specific assignment language referencing the statute. State and local government assignments vary by jurisdiction. Many factoring companies accept federal and state government receivables but require extra documentation compared to private-sector accounts. Verify that your government contract does not include an anti-assignment clause before submitting those invoices for funding.
What is the difference between a factoring company and a factoring broker?
A factoring company funds invoices using its own capital and earns the discount fee directly. A factoring broker matches businesses with funding sources in exchange for a referral fee paid by the factor—typically not by the business seeking financing. Brokers can help identify programs suited to specific industries or volume levels, but they add a layer between you and the actual funder. When speaking with a provider, confirm early whether they are a direct funder or a broker, and ask where your invoices would actually be purchased and held.
How do I end a factoring relationship?
Ending a factoring agreement requires reviewing the contract for three things: the required notice period (typically 30 to 90 days of written notice before the end of the current term), any early termination fee (often calculated as a percentage of the facility limit or a multiple of average monthly fees), and any auto-renewal clause that may have already extended the term without your action. After the termination takes effect and all outstanding obligations are settled, the factor must file a UCC-3 termination statement releasing their lien on your receivables. Confirm receipt of the UCC-3 filing in writing before opening a new factoring account.