No. It is the sale of an asset - the invoice. That is why it does not appear as debt in the way a loan does, and why a business can factor without meeting borrowing tests.

How much of the invoice do I get up front?

Typically 80% to 90%, with the balance released less fees when your customer pays. Industry and customer credit quality drive the advance rate.

Invoice factoring: how it works, what it costs, who it suits

Invoice factoring

Factoring is a sale, not a loan. You transfer the invoice and the right to collect it; the factor advances most of the face value immediately and remits the rest, less its fee, when your customer pays. Because the factor's risk sits with your customer's credit rather than yours, factoring reaches businesses that cannot borrow.

Recourse versus non-recourse

Under recourse factoring, if your customer does not pay, you buy the invoice back. Under non-recourse, the factor absorbs the loss - but only for the specific, narrowly defined reason stated in the contract, almost always the customer's formal insolvency, and never a dispute over the work.

Non-recourse is widely marketed as risk transfer and rarely is. Read the definition of the covered event before paying the premium for it.

The cost arithmetic

A fee of 2% per 30 days sounds small and is not: on an invoice that takes 60 days to collect, that is 4% of face value for two months of money, an APR equivalent in the mid-twenties. Add-ons - application fees, monthly minimums, wire fees, and lockbox charges - are common and can double the effective cost on low volumes.

Your customer will know

In notification factoring, which is the norm, your customer is told to pay the factor directly. Some businesses find that damages a relationship; others find their customers do not care at all. Non-notification arrangements exist but generally require stronger credit.

Commonly used for

B2B businesses with creditworthy customers and long payment terms
Staffing, freight, and manufacturing, where factoring is routine and unremarkable
Fast-growing businesses whose receivables grow faster than their cash

What to check before signing

Monthly minimum volume commitments can cost more than the factoring itself
Long notice periods and termination fees are common in factoring contracts
Non-recourse usually covers insolvency only, not slow payment or disputes
The factor underwrites your customers, so concentration in one client is a problem

Factoring: common questions

Is factoring a loan?: No. It is the sale of an asset - the invoice. That is why it does not appear as debt in the way a loan does, and why a business can factor without meeting borrowing tests.
How much of the invoice do I get up front?: Typically 80% to 90%, with the balance released less fees when your customer pays. Industry and customer credit quality drive the advance rate.