How invoice factoring works: four steps from invoice to cash
- You sell an unpaid invoice to a factoring company.
- It advances you part of the invoice, sometimes up to 90%.
- It collects payment from your customer.
- It sends you the rest of the invoice, minus its fees.
With recourse factoring, you owe the money back if your customer never pays. With non-recourse factoring, the factoring company takes that loss, so fees are usually higher. Invoice financing is different: you borrow against invoices and still collect from customers yourself.
True cost: a 3% monthly fee on a $10,000 invoice costs $300 a month, an APR of about 42%
| Customer pays in | Advance | Fee | Paid to you later | Total you receive |
|---|---|---|---|---|
| 30 days | $8,500 | $300 | $1,200 | $9,700 |
| 60 days | $8,500 | $600 | $900 | $9,400 |
NerdWallet works out the 30-day case as an APR of about 42.35%. The slower your customer pays, the more you pay: the fee doubles to $600 at 60 days. Extra fees, such as service fees, monthly minimums and origination fees, add to this.
Pros and cons: cash from invoices you already earned, but the factor deals with your customers
Pros
- Turns slow-paying invoices into cash now.
- Easier to qualify for; your customers' credit counts most.
- No separate collateral; the invoices back the deal.
Cons
- Costly when customers pay slowly.
- The factoring company contacts your customers to collect.
- Only works for businesses that invoice other businesses.
When invoice factoring fits, and when it doesn't
It fits when
- You sell to other businesses on 30 to 90 day terms and wait to get paid.
- Your customers have stronger credit than your business does.
Look elsewhere when
- You sell to consumers and do not invoice.
- Your customers pay late or dispute invoices often.
- You want to keep collections in house; compare invoice financing or a line of credit.
Red flags: fees that stack, monthly minimums and long contracts
Watch out
A low headline fee with service, origination and monthly minimum fees on top.
Recourse terms you did not expect, which leave you owing on unpaid invoices.
A contract that requires you to factor all invoices or locks you in for a long term.
State rules: factoring is covered by some disclosure laws
Several states now require a written cost disclosure before a factoring deal is signed, and some, like New York and California, require an estimated APR. New York covers deals up to $2.5 million, California up to $500,000, Virginia sales-based deals up to $500,000, and Vermont adds rules on July 1, 2027. Some of these states also regulate brokers like Batch Capital.
New Jersey has no commercial financing disclosure law yet. Bill S1760 was introduced on Jan 13, 2026 and sits in committee. See our state disclosure law lookup and the New Jersey MCA law guide.
This is general information, not legal advice, as of Oct 20, 2026.
Alternatives to invoice factoring
- Line of credit: borrow against your own credit and keep collections.
- Term loan: for a one-time cost.
- Merchant cash advance: for card-heavy businesses; usually costs more.