# How Invoice Factoring Works

> Invoice factoring turns unpaid B2B invoices into cash now instead of waiting 30, 60, or 90 days to get paid. You sell the invoice to a factoring company at a small discount — here's exactly how that works and what it costs.

## Key takeaways
- Invoice factoring sells your unpaid B2B invoices to a factor for most of the cash up front (commonly 80–90%), with the reserve released minus fees once your customer pays.
- It's priced as a factor fee that grows the longer an invoice stays unpaid, so it works best when customers reliably pay within terms.
- Recourse factoring is cheaper but you buy back unpaid invoices, while non-recourse costs more but shifts covered credit risk to the factor.
- Approval leans on your customers' credit rather than your own, making it a fit for profitable but cash-tight B2B businesses.

## What invoice factoring is

Invoice factoring is a way to **sell your outstanding B2B invoices** to a
third-party "factor" in exchange for most of the cash up front. Instead of
waiting for a customer to pay on net-30/60/90 terms, you get paid quickly and the
factor collects from your customer directly.

It's most common in industries with long payment cycles and reliable
business customers — trucking, staffing, manufacturing, wholesale, and
professional services.

## How the process works, step by step

1. **You deliver goods or services** and invoice your customer as usual.
2. **You sell the invoice** to a factoring company.
3. **The factor advances** a large share of the invoice value up front — commonly in the **80–90%** range.
4. **Your customer pays the factor** directly when the invoice comes due.
5. **The factor releases the rest** (the "reserve") to you, minus its fee.

So if you factor a $10,000 invoice at an 85% advance, you might get $8,500 right
away, then the remaining $1,500 minus fees once your customer pays.

## What it costs

Factoring is priced as a **factor fee** (sometimes called a discount rate) rather
than a traditional APR. A few things drive the total cost:

- **The fee rate** charged per period (e.g., per 30 days)
- **How long the invoice stays unpaid** — longer = more expensive
- **Your customers' creditworthiness and payment history**
- **Volume** — larger, steady volume often earns better pricing

Because the cost grows with time-to-payment, factoring works best when your
customers reliably pay within terms.

## Recourse vs. non-recourse

- **Recourse factoring** (most common, cheaper): if your customer never pays, **you** buy the invoice back or replace it.
- **Non-recourse factoring** (pricier): the factor absorbs the loss if the customer defaults for covered reasons — but read the fine print on what's actually covered.

## Factoring vs. a line of credit

| | Invoice factoring | Line of credit |
| --- | --- | --- |
| Based on | Your customers' credit | Your business's credit/revenue |
| Adds debt? | Usually no (asset sale) | Yes |
| Best for | Slow-paying B2B invoices | Flexible, recurring cash needs |

## Pros and cons

**Pros**

- Fast access to cash tied up in receivables
- Approval leans on your **customers'** credit, not just yours
- Scales naturally as your invoicing grows

**Cons**

- Costs more than traditional bank financing
- The factor may **contact your customers** to collect
- Best suited to **B2B** invoices, not consumer sales

## When factoring makes sense

Consider it if you're a B2B business that's profitable on paper but **cash-tight
because customers pay slowly**, you need predictable cash flow to cover payroll
or materials, or your own credit isn't strong enough for cheaper options yet.

### Getting matched

Factoring terms — advance rate, fees, and recourse — vary widely between
providers. Tell Hoss Capital about your invoices and customers once, and we'll
match you with factoring companies suited to your industry and volume — free,
with no hard credit pull to start.

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