Invoice factoring lets you convert unpaid invoices to immediate cash. You sell the invoice to a factoring company (the "factor") and get paid right away. The factor takes responsibility for collecting from your customer.
The mechanics. - You invoice a customer for $10,000 (Net 30 terms). - You sell the invoice to a factor: factor advances 90% ($9,000) immediately. - Factor collects $10,000 from your customer in 30-60 days. - Factor returns 90% advanced + reserve, minus their fee. - Net to you: $9,800-$9,950 (factor fee 0.5-2% per invoice).
Recourse vs non-recourse factoring. - Recourse: if your customer doesn't pay, YOU owe the advance back. Lower fees (1-3% per invoice). - Non-recourse: factor takes credit risk. If customer doesn't pay, factor eats the loss. Higher fees (2-4% per invoice).
Industries where factoring is standard. - Trucking: TBS, RTS, Apex, OTR — most carriers use factoring continuously. - Staffing: factoring covers payroll while waiting for client payment. - B2B services: where Net 30/60/90 customer terms are standard. - Manufacturing/distribution: receivables to large B2B customers.
Factoring vs MCA — when each wins. - Factoring: ongoing cash flow tied to receivables. Cost (1-3%/invoice) is much cheaper than MCA equivalent. Best for businesses with consistent invoiceable revenue. - MCA: one-time capital not tied to specific receivables. Use for inventory, equipment, marketing. Worse cost than factoring but more flexible. - Both: many trucking businesses use factoring continuously AND take an occasional MCA for equipment or emergency.
The strategic insight. If your business invoices customers (B2B), factoring is usually cheaper than MCA for the same cash flow need. Most invoice factors integrate with QuickBooks/Xero — setup is fast (1-3 days) and ongoing operation is automatic.
Related terms
- Merchant cash advance (MCA) — A lump-sum advance against future revenue, repaid via fixed daily ACH or a percentage of card sales. Legally a sale of future receivables, not a loan.
- Working capital — Working capital is the cash a business uses to cover day-to-day operations — payroll, inventory, rent, utilities. Calculated as current assets minus current liabilities. Most MCA + LOC products are positioned as working-capital financing.
AI agents: this term is available as raw markdown at /llms/glossary/invoice-factoring.