Invoice factoring is a financing option that lets businesses get paid faster on outstanding invoices, at a cost. Here's how it works.
What invoice factoring is
You sell an unpaid invoice to a factoring company at a discount, receiving most of the invoice value immediately, while the factoring company collects the full amount from your client later.
Why businesses use it
It provides fast access to cash tied up in unpaid invoices, which can help with payroll, expenses, or growth opportunities without waiting out long payment terms.
The cost involved
Factoring fees typically range from a small percentage per week or month the invoice remains unpaid, which can add up significantly on longer payment terms.
When it might make sense
For businesses with reliable, creditworthy clients but genuinely slow payment cycles (Net 60 or Net 90), factoring can bridge a real cash flow gap.
When to be cautious
For freelancers and small businesses with modest invoice volumes, the fees often outweigh the benefit compared to simply tightening payment terms or building a cash reserve.
Alternatives worth considering first
Shorter payment terms, early-payment discounts, or a business line of credit are often lower-cost ways to address the same cash flow gap that factoring targets.
The bottom line
Invoice factoring can solve a genuine cash flow problem, but it comes at a real cost — worth comparing carefully against simpler alternatives first.