Invoice factoring
A finance company (a factor) buys your unpaid invoices to other businesses at a discount, pays you for them before your customers do, and collects the money from your customers.
- Secured on invoices
How it works
Factoring is selling your invoices (your accounts receivable) rather than borrowing against them.
- You sell goods or services to a business customer on payment terms and invoice them.
- You sell the invoice to the factor for less than its face value.
- Your customer is usually told to pay the factor directly, and the factor collects the payment.
There are two basic kinds. In discount factoring, the factor pays you before the invoice is due, minus its charge. In maturity factoring, it pays you on the due date and mainly takes over credit checks and collections.
The factor looks mostly at your customers' credit rather than yours. It usually sets an overall limit for you and a limit for each customer, and it can refuse invoices from customers it does not want to take on. Many factors also run credit checks, keep the records and chase payments.
Traditionally a factor buys invoices without recourse, which means it takes the loss if your customer does not pay. Read your agreement to see whether you must buy back invoices that go unpaid (with recourse).
Exporters: factors can also buy invoices owed by customers abroad. The U.S. government's Trade Finance Guide says advances on export invoices are generally limited to 80% of their value.
Upsides and downsides
Upsides
- Turns unpaid invoices into cash before your customers pay
- The amount available grows as your sales grow
- Because the factor looks mostly at your customers' credit, a young business can use it
- The factor can take over credit checks and collections
Downsides
- Your customers usually pay the factor, so they know you use one
- The discount reduces your margin on every invoice
- The factor can refuse invoices from customers it does not trust
Risks
- With recourse, you must pay back the factor for invoices your customers do not pay
- Coming to depend on factoring makes it hard to stop, because you would lose the early cash
What it costs
- How it is priced
- A discount or fee on each invoice you sell, set by the factor, plus any account fees
- Costs that are easy to miss
- The total cost depends on how long your customers take to pay, so ask for it in dollars, and as an APR where your state requires one
- Contract terms such as minimum volumes or fees for ending the agreement, so read them before you sign
- If the agreement is with recourse, the cost of buying back invoices your customers do not pay
Up to the value of the invoices the factor accepts, so it rises and falls with your sales.
Have an offer? Cost of factoring an invoice: work out the cost of an invoice
Does it fit?
Could fit when
- You sell to other businesses and wait 30 days or more to be paid
- Your sales are growing and cash is tied up in unpaid invoices
- You would like help chasing late payers
Unlikely to fit when
- Your customers pay on the spot or by card rather than on invoice
- Your unpaid invoices are worth less than the amount you need
- Your margins are too thin to absorb the discount
Who can use it
- Business types: Sole proprietorship, Partnership, LLC, S corporation, C corporation, Benefit corporation, Cooperative, Nonprofit
- Needs sales (revenue)
- Only for businesses that sell to other businesses
- You invoice other businesses on payment terms
- The factor checks your customers' credit as well as yours
Am I ready?
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- Accounts receivable aging report
- Customer details
- Contracts and terms
Regulation and protections
Regulators: Federal Trade Commission (FTC); State lending and financial regulators.
Who runs it: Private providers, nationwide.
Banks can be factors, but most factoring is done by businesses that are not regulated as banks. Federal Truth in Lending rules do not apply to business finance. Where a factoring agreement includes credit, Regulation B says the factor must tell you its decision within a reasonable time and, if it turns you down, give you its reasons in writing if you ask in writing within 60 days. The FTC Act bans unfair or deceptive practices. Several states require factors to disclose their costs; see below.
Rules that differ by state
- California: A factor that is not a bank or credit union must give you a disclosure before you sign an offer of $500,000 or less, showing the funds you get, the total dollar cost, the term, the payments, the prepayment rules and an APR or estimated APR, and must get your signature on it. For an agreement covering many invoices, it can show an example transaction instead. State rules in force since October 1, 2023 ban unfair, deceptive or abusive practices in commercial financing to small businesses, farms and nonprofits. (California Financial Code, Division 9.5: Commercial Financing Disclosures (sections 22800 to 22807); DFPI: commercial financing disclosure regulations effective December 9, 2022; DFPI: Advisory to small businesses on merchant cash advances (April 14, 2025))
- New York: A factor that is not a bank or other financial institution must disclose, when it makes a specific offer of $2.5 million or less, the price it pays for your invoices, the finance charge and an estimated APR calculated under federal Truth in Lending rules. Factors that make five or fewer deals a year in New York are not covered. (New York Financial Services Law section 802: exemptions; New York Financial Services Law section 806: factoring transaction disclosures)
- Utah: A provider that makes more than five commercial financing deals a year in Utah, including buying invoices, must register with the state and, before you sign a deal of $1 million or less, disclose the funds you get, the total you will pay, the total dollar cost, the payments and any prepayment costs. No APR is required. Banks and credit unions are exempt. (Utah Code Title 7, Chapter 27: Commercial Financing Registration and Disclosure Act)
- Florida: For deals of $500,000 or less made since January 1, 2024, a provider that is not a federally insured bank or credit union must disclose in writing, at or before signing, the funds provided, the total you will pay, the total dollar cost, the payments and any prepayment costs. For an agreement to buy many invoices over time, it can base the disclosure on an example invoice of $10,000. No APR is required. (Florida Statutes, chapter 559, part XIII: Florida Commercial Financing Disclosure Law (559.961 to 559.9615))
- Georgia, Kansas: Since January 1, 2024 in Georgia and July 1, 2024 in Kansas, a factor that makes more than five commercial financing deals a year in the state must disclose, before or when you sign a deal of $500,000 or less, the funds provided, the amount actually paid out, the total you will pay, the total dollar cost, the payments and any prepayment costs. No APR is required. The law covers buying invoices as well as loans. Banks and credit unions, and financing secured by real property, are not covered. Brokers may not charge you an upfront fee. The state attorney general enforces the law; it gives you no right to sue. (Georgia SB 90 (2023), as passed (Act 78): commercial financing disclosures, O.C.G.A. 10-1-393.18; Georgia General Assembly: SB 90 (2023-2024 session), status history (Act 78, effective January 1, 2024); Kansas Statutes 75-783: Commercial Financing Disclosure Act, definitions (2024); Kansas Statutes 75-784: required disclosures (2024); Kansas Statutes 75-785 to 75-787: exceptions, brokers and penalties (2024))
- Missouri: A factor that makes more than five commercial financing deals a year with Missouri businesses must disclose, at or before signing a deal of $500,000 or less, the funds provided, the amount actually paid out, the total you will pay, the total dollar cost, the payments and any prepayment costs. No APR is required. For an agreement to buy many invoices over time, the factor can base the disclosure on an example invoice of $10,000. Banks and credit unions, financing secured by real property, and leases are not covered. Brokers must register with the Division of Finance and hold a $10,000 bond. The law's start date was February 28, 2025, unless the Division chose to make rules first; the Division publishes the registration form under it. The attorney general enforces the law; it gives you no right to sue. (Revised Statutes of Missouri 427.300: Commercial Financing Disclosure Law; Missouri Division of Finance: consumer credit licensing (commercial financing registration and bond forms))
- Texas: When a business sells its invoices at a discount, Texas law says the discount is not interest, and an agreement that calls the deal a purchase settles that it is not a loan, so the state's interest ceilings do not apply to it. (Texas Finance Code chapter 306: commercial transactions)
- Tennessee: When one business sells its invoices or other accounts to another at a discount or for a fee, Tennessee law says the discount or fee is not interest, even if the seller has to buy back invoices that go unpaid, so the state's interest ceilings do not apply to it. (Tennessee Department of Financial Institutions: rates of interest (the maximum effective formula rate, announced each week); Tennessee Code Unannotated, free public access (LexisNexis), current through the 2026 regular session: section 47-14-102(1) and (8))
Types of provider: Independent factoring companies; Banks that buy receivables; Online invoice finance platforms.
Also consider
What has changed
No changes since this page was published. It was last checked against its sources on October 17, 2026.
Sources
- OCC Comptroller's Handbook: Accounts Receivable and Inventory Financing (factoring) · checked October 20, 2026
- U.S. Department of Commerce: Trade Finance Guide (export factoring) · checked October 17, 2026
- 12 CFR 1002.9 (Regulation B): notifications, including for credit incident to factoring · checked October 17, 2026
- 12 CFR 1026.3 (Regulation Z): exempt transactions, including business credit · checked October 17, 2026
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