Waiting for a customer to pay can leave you short on cash. So how does invoice factoring work? You sell an unpaid invoice to a factor, receive most of its value up front, and get the rest, minus fees, when your customer pays.
This page is one part of a wider series on invoice factoring, written to explain the basics in plain language.
| Item | Typical value |
|---|---|
| Advance rate (share of the invoice paid up front) | 70% to 95% |
| Reserve (share held back until your customer pays) | 5% to 30% |
| Factoring fee range | 1-5% of invoice value |
| Time to receive the advance | 24-48 hours |
| Typical recourse buy-back period | 90 days |
These ranges come from Merchant Maverick’s guide, updated Dec 17, 2025, and Ramp’s guide, published November 20, 2025. They are general ranges, not offers, and the figures can change, so check the sources before you rely on them.
The parties and the money in a factoring deal
According to eCapital’s guide, last modified Jul 29, 2026, a factoring agreement has three key parties. eCapital is itself a factoring provider, so treat its description as one industry view.
- Client business: the seller of the invoices, which is you.
- Account debtors: your customers, who owe the invoice payments.
- Factoring company: the firm that buys the invoices and advances cash.
The same guide says there are three main financial transactions for each invoice financed. Together they decide how much cash you get early and how much you get later.
- The advance: the share of the invoice paid up front. Merchant Maverick (Dec 17, 2025) says advance rates typically range from 70% to 95%.
- The reserve: the portion held back until your customer pays. The same guide says it is often 5% to 30% of the invoice value.
- The factoring fee: the charge for the service, also called the discount rate. It is deducted from the advance or from the reserve, depending on the provider.
How does invoice factoring work, step by step?
Ramp (published November 20, 2025) describes a four-step cycle that typically completes within a few business days. The order below follows that description.
- Submit the invoice. You send the unpaid invoice with supporting documents such as purchase orders, delivery receipts or contracts. The factor reviews your customer’s creditworthiness, because your customer is ultimately responsible for payment.
- Receive the advance. Once the invoice is approved, funds usually arrive by wire transfer or ACH deposit within 24-48 hours.
- Your customer pays the factor. The factor tells your customer the invoice has been assigned and gives new payment instructions. Your customer then pays the factor under the original terms.
- Receive the remaining balance. After your customer pays in full, the factor deducts its fee and releases the reserve.
Fit Small Business (updated May 15, 2025) starts one step earlier. It says the factoring company first carries out due diligence on your invoiced customers to see if they are good credit risks, and sets the fees and discount rate from their creditworthiness.
That means the quality of your customers matters as much as your own business. A slow or weak payer can change the terms you are offered.
A worked example with round numbers
Merchant Maverick (Dec 17, 2025) gives a simple case. A business sells a $10,000 invoice to a factor, which advances 85% ($8,500) up front and holds 15% ($1,500) in reserve.
When the customer pays, the factor releases the reserve minus its fee and any adjustments, such as chargebacks or refunds. The fee is the cost of getting the cash early.
Fit Small Business (updated May 15, 2025) offers a second case. With an 80% advance rate and a monthly factor rate of 3%, a customer that repaid within 30 days would leave the business with the remaining 17%.
The lesson is about timing. Fit Small Business says discount rates are charged at regular intervals, so the time it takes for the customer to pay your invoice will determine your cost.
What does invoice factoring cost?
Ramp (published November 20, 2025) says fees typically range from 1-5%. It adds that the exact rate depends on invoice size, customer creditworthiness, payment terms, the factoring type and your sales volume with the factor.
Pricing models differ. Ramp says some factors charge a flat rate on the invoice amount, while others use a time-based model where fees increase the longer your customer takes to pay. Its example of time-based pricing starts at 1% for the first 30 days and then adds 0.5% for each additional week.
Volume can also change the price. Fit Small Business (May 15, 2025) notes that many factors use tiered discount rates, so the more you factor in a month, the lower your rate can be. It also warns that fees on invoice factoring can be much higher than other forms of business financing.
Ramp adds that, beyond the basic discount rate, factors may charge various other fees. Read any fee schedule line by line. Terms vary by provider and country, and this site does not provide or arrange factoring.
Recourse, non-recourse and other variations
The biggest split is who absorbs the loss if a customer does not pay. This site covers it in more depth in a comparison of recourse vs non-recourse factoring.
- Recourse: you stay responsible. Ramp says that if the invoice goes unpaid after a set period, typically 90 days, you must buy it back or replace it with another invoice. Costs are generally lower because the factor takes on less risk.
- Non-recourse: the factor assumes the credit risk if your customer becomes insolvent. Merchant Maverick says disputes, fraud or performance issues are usually excluded, and that the cover costs more.
- Spot factoring: you choose which individual invoices to sell rather than committing to all or most of them. Merchant Maverick contrasts this with high-volume factoring, which requires a contract to factor most or all invoices.
There is also the question of whether your customers are told. Fit Small Business calls nonnotification factoring an uncommon type that prevents the factoring company from communicating with clients. The choice is explained further in a guide to notification vs non-notification factoring.
How factoring differs from invoice financing, and the trade-offs
The two are easy to confuse. Ramp says that with factoring you sell your invoices to a third party that takes ownership and collects payment from your customers, while with invoice financing you borrow against the invoices and keep ownership and collections.
On debt status, Ramp’s comparison lists factoring as not considered a loan and invoice financing as considered a loan. Fit Small Business likewise describes factoring as an advance rather than a loan. How a deal is treated in your accounts or for tax is a question for a qualified professional.
Ramp also lists drawbacks worth weighing:
- Customers interact directly with the factor, which may affect your relationships.
- Your business may become dependent on factoring for ongoing cash flow.
- You give up control over the collections process.
Merchant Maverick says factoring is most commonly used in B2B industries with long payment terms, such as transportation, staffing, government contracting, advertising and media.
Frequently asked questions
Is invoice factoring a loan?
Show answer
Sources describe it as a sale of invoices rather than borrowing. Fit Small Business (updated May 15, 2025) says it is not considered a loan but an advance, and Ramp (published November 20, 2025) lists its debt status as not considered a loan. Treatment can differ by provider and country.
How fast can the money arrive?
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Descriptions differ by source. Ramp (published November 20, 2025) says funds usually arrive in 24-48 hours. eCapital (last modified Jul 29, 2026) says a same-day transfer is possible if the request comes early enough in the day, and otherwise within a day. These are provider descriptions, not promises, and speed varies.
Will my customers know I use a factor?
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Usually, yes. Ramp says the factor notifies your customer that the invoice has been assigned and provides new payment instructions. Fit Small Business says nonnotification arrangements exist but are uncommon.
What happens if my customer never pays?
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It depends on the agreement. With recourse terms the loss can come back to you, while with non-recourse terms the factor carries the risk of a customer’s insolvency. Even then, Merchant Maverick says disputes, fraud or performance issues are usually excluded, so read the contract wording closely.
This page is for general information and education only and is not financial, investment, tax or legal advice.
