What is Invoice Factoring? A Guide for Small Business

Unlocking Cash with Invoice Factoring

For many B2B businesses, Net 60 or Net 90 payment terms are a reality of dealing with large corporations. Waiting two to three months for a $50,000 invoice to be paid can absolutely cripple a small company's ability to cover payroll or take on new jobs. Enter invoice factoring.

How Invoice Factoring Works

Invoice factoring is a financial transaction in which a business sells its accounts receivable (invoices) to a third-party financial company (a factor) at a discount.

1. You perform the work and send an invoice to the client for $10,000.
2. You submit that invoice to the factoring company.
3. The factoring company immediately advances you ~80-90% of the invoice value (e.g., $8,500).
4. The factoring company assumes responsibility for collecting the payment directly from your client.
5. Once the client pays the full $10,000 to the factoring company, they remit the remaining 10-20% back to you, minus their factoring fee (typically 1% to 5%).

The Pros and Cons

The Advantage: Immediate cash. This fast liquidity allows you to buy inventory, launch marketing campaigns, and grow without being choked by long payment cycles.

The Disadvantages: It is expensive. Giving up 3% to 5% of your gross margin on a project is a massive cost. Additionally, in some factoring arrangements (recourse factoring), if the client ultimately goes bankrupt and never pays, you have to buy back the bad invoice from the factoring company.

It should be used strategically as a growth tool, not a permanent crutch for poor cash management.