Invoice Factoring

It depends on whether you use recourse or non-recourse factoring, and whether factoring is disclosed to customers. In most cases, your customers are notified to remit payments to the factoring company rather than to you. Most factoring companies handle collections professionally. If you prefer to maintain full control of customer relationships, invoice discounting (where you collect payments yourself) may be a better alternative.

The factoring fee (also called the discount rate) is typically 1-5% of the invoice value. Some factoring companies charge a flat rate regardless of how long the invoice takes to collect; others charge a weekly or monthly rate that adds up the longer your customer takes to pay. Always clarify whether you're looking at a flat fee or an accruing rate the total cost can differ significantly.

They're closely related but different. Invoice factoring involves selling your invoices outright the factoring company takes ownership and collects payment directly from your customers. Accounts receivable (AR) financing is a broader category that includes both factoring and invoice discounting (where you retain ownership and collection responsibility). With AR financing via invoice discounting, your customers may not know a third party is involved.

Invoice factoring is most common in B2B industries with long payment cycles: trucking and freight, staffing agencies, manufacturing, construction, healthcare (especially medical billing), and wholesale distribution. It's particularly valuable for businesses experiencing fast growth where revenue is outpacing cash flow.

It depends on your factoring agreement. With recourse factoring, you're responsible for buying back the unpaid invoice if your customer doesn't pay within a specified period (usually 90 days). With non-recourse factoring, the factoring company absorbs the loss if your customer becomes insolvent but you pay higher fees for this protection, and coverage is usually limited to customer insolvency, not disputes.

Factoring is structured as a sale of receivables rather than a loan, so it typically does not add debt to your balance sheet. That distinction can matter for businesses managing loan covenants or preparing for other financing.

Often, yes, though construction factoring is specialized because of progress billing and lien waivers. Factors experienced in construction handle these routinely, and their terms may differ from standard factoring.