If your business has struggled with cash-flow problems, you may have searched high and low for ways to keep operations moving. One of the most popular solutions is invoice factoring, which means selling unpaid invoices to a third-party factoring company for immediate cash.
A factoring company account advances most of your invoice value within a day or two, then waits to collect from your customer. You get breathing room to cover payroll, buy inventory, or accept a big order without taking on traditional debt or credit risk.
However, invoice factoring has its downsides. High fees, strict contracts, and loss of control over customer payments can create more problems than they solve. That’s why many businesses now prefer newer solutions like NowCorp when they need quick access to funds.
In this guide, we’ll explain how invoice factoring works, highlight its pros and cons, and show you why NowCorp is a smarter, more flexible choice for growing businesses.
How Factoring Receivables Works
Factoring receivables, sometimes called accounts receivable factoring, turns unpaid invoices into near‑immediate cash. Instead of waiting 30, 60, or 90 days for customers to pay, a business can sell those invoices to a receivables factoring company at a discount and walk away with working capital in hand.
The typical factoring process looks like this:
- You hand over a batch of approved, credit-worthy invoices to the factor.
- Within a day or two, the factor wires you 70 – 90 percent of the invoice value.
- Your customer pays the factor on the original terms.
- Once the invoice is paid, you receive the rest minus the factor’s fee.
Because the advance is tied to an asset (the invoice) rather than your credit score, this setup often moves much faster than bank financing. But it also means giving up control of your customer payments to a third party.
Factoring Company vs Bank Loan: Which is Better for Cash Flow?
Factoring receivables companies operate differently from traditional lenders because they do not offer loans. Instead, they purchase assets, that is, your invoices.
Essentially, you do not incur any new debt. You are simply converting your unpaid invoices (accounts receivable) into immediate working capital.
Let’s take a look at how factoring and bank loans compare.
1) Speed of Funding
Factoring Company: Typically provides cash within 1-2 days after invoice submission, which is ideal if you need immediate funds.
Bank Loan: The approval process can take weeks or even months, including paperwork, credit checks, and collateral assessments.
2) Credit Requirements
Factoring Company: Approval is based on your customers’ creditworthiness, not your own. This makes factoring more accessible to businesses with weaker credit.
Bank Loan: Banks focus on your business’s financial history, credit score, and collateral.
3) Debt and Liability
Factoring Company: Factoring is not a loan, so it does not add debt to your balance sheet. You receive a cash advance based on the value of your unpaid invoices.
Bank Loan: Bank loans are a form of debt. They require regular payments and can strain your cash flow if business slows down.
Types of Receivables Factoring Companies Handle
Several businesses lean on factoring trade receivables, but B2B sectors use it most.
1) Staffing and Recruitment Agencies
Staffing agencies also rely heavily on factoring to maintain smooth operations. These businesses pay temporary workers on a weekly or biweekly basis, but their clients may take several days to settle invoices.
In this regard, a staffing agency can factor its invoices and receive funds to cover payroll, taxes, and other expenses, and maintain strong relationships with both its workers and clients.
2) Manufacturing and Wholesale
Manufacturers face heavy upfront costs for raw materials, labor, and energy long before retailers or distributors pay their invoices. When production can’t wait, factoring unlocks tied-up capital and allows them to restock materials and meet payroll effortlessly.
For wholesalers, the same strategy keeps shelves full and purchase orders flowing, even when customers buy on long net terms.
3) Professional Services (Consulting, Marketing, Legal)
Consultants, marketing agencies, and law firms regularly bill after milestones or project completion. They may complete large projects but multiple days for payment. For smaller firms, this delay can disrupt cash flow and make it difficult to cover operating expenses.
Factoring lets service providers monetize invoices the moment they’re issued. They get quick cash to cover everyday expenses and pitch new business without fretting about the next deposit.
4) Retail and E-Commerce Suppliers
Since big-box chains and online platforms often take up to 90 days to pay suppliers, they must cover inventory, shipping, and packaging costs upfront. Factoring turns those unpaid invoices into immediate cash, helping suppliers restock and seize seasonal sales opportunities.
The result is steadier business financing, stronger supplier relationships, and the freedom to take on growth orders confidently.
Benefits of Using an Invoice Factoring Company
Invoice factoring gives businesses a quick way to unlock the cash tied up in unpaid invoices. Here are the main reasons many owners turn to it when money gets tight.
1) Get Cash Fast
An invoice factoring company turns unpaid invoices into working money in as little as 24–48 hours. Rather than wait 30, 60, or 90 days for customers to pay, you can cover payroll, buy inventory, or accept new orders right away.
2) No Extra Debt
Since the advance is based on the invoice value, factoring doesn’t add a loan to your balance sheet. You stay clear of interest charges and monthly repayments while still keeping day-to-day operations moving.
3) Easy Approval
A factoring receivables company looks at your customers’ credit, not yours. Even a young business with a limited credit history can qualify if its buyers have a strong track record of paying on time.
4) Less Back-Office Work
Many factoring providers handle invoice tracking and follow-ups for you. With collections off your plate, your team can focus on sales, service, and growth instead of chasing payments.
Are There Downsides to Invoice Factoring?
While invoice factoring can provide quick access to funds, there are some potential drawbacks you must consider before committing.
1) Costs Can Add Up
Factoring companies charge a discount rate on each invoice, typically ranging from 1% to 5%. On top of that, you may face extra fees for processing, account management, or even late payments from your customers. If you rely on the service month after month, these charges can chip away at your profit.
2) Contract Commitments
Many providers set monthly minimums or ask for multi-year agreements. Should sales slow, or you find a cheaper option, you could still owe fees for falling short or ending the contract early.
3) Less Control Over Customer Payments
Because the factor collects directly from your customers, a third party steps into your billing process. Some clients won’t mind, but others may question why they’re suddenly paying someone new.
4) Tougher Approval Standards
Factoring companies have specific criteria for the invoices they will purchase. They often set credit standards for your customers and may reject invoices that don’t meet these requirements.
In some cases, they also hold back a portion of each advance as a security measure. If your customers don’t have strong credit or you work with new buyers, fewer of your invoices may qualify for factoring.
How Much Does Factoring Cost?
Factoring isn’t free money. While it can solve short-term cash flow gaps, you’ll pay several factoring fees along the way. Let’s break down the common charges.
1) Discount Rate
Accounts receivable factoring gives you most of your invoice value, say 85%, and keeps a small percentage as payment. That cut, called the discount rate, usually runs between 1% and 5% of the invoice total. The rate will depend on your industry, your customers’ payment history, and the length of your payment terms.
2) Service Fees
Many factoring companies charge service fees on top of the discount rate. These can include:
- Processing Fees: A charge for handling and verifying invoices.
- Account Maintenance Fees: Ongoing charges for keeping your factoring account active.
- Collection Fees: Costs associated with collecting payments from your customers.
- Late Payment Fees: If your customer doesn’t pay on time, the factoring company may charge you extra.
Again, these fees vary based on the factoring company and the agreement you sign. Always read the fine print to understand what you may be paying.
3) Reserve Fees
Some factoring receivables companies hold back a portion of the invoice amount as a reserve fee. This serves as a safety net in case your customer doesn’t pay. Once the customer settles the invoice, the reserve amount (minus any fees) is released to you.
For example, if you factor a $10,000 invoice with a 10% reserve, the company might give you $9,000 upfront and hold back $1,000. After the customer pays, you receive the remaining $1,000 minus any additional fees.
A Better Alternative to Traditional Factoring
Many of the drawbacks we’ve listed above can make business owners second-guess using factoring companies. That’s where NowCorp stands apart, delivering faster invoice payments while eliminating most of these common pain points.
1) Keep Your Balance Sheet Clean
NowCorp’s NowAccount advances up to 100 percent of an approved invoice’s value without creating debt or requiring a personal guarantee. All advances are non-recourse, so if a qualified buyer does not pay, the risk stays with us, not you.
2) One Flat, Transparent Fee
Instead of layered discount rates, holdbacks, and late-payment surcharges, NowAccount charges a simple flat rate that never creeps higher with surprise add-ons. You know your cost up front and can price it into bids with confidence.
3) Complete Flexibility
You can choose which customers and invoices to run through our factoring company alternative. There are no monthly minimums or long-term lock-ins. If sales dip or you land a one-off contract, just fund what you need and keep the rest on your books.
4) Keep Control of Customer Relationships
With NowCorp, your customers keep paying you directly. Unlike factoring, where a third party takes over collections, NowCorp leaves your invoicing process untouched, so you maintain control over your client relationships.
NowCorp works best for B2B and B2G invoices on net-30, net-45, or net-60 terms. If your customers have solid payment histories and your invoices are for completed, delivered work, you’re likely a strong fit.
Final Thoughts
Invoice factoring is a simple idea: sell your unpaid invoices to factoring receivables companies, so you can get cash right away. Many firms lean on accounts receivable factoring to cover payroll, refill inventory, or jump on growth opportunities without adding traditional debt.
Yet, invoice factoring services can also bring high fees, long contracts, and third-party control over customer payments.
NowCorp keeps the fast funding but removes the friction. You keep your customer relationships, pay one flat fee, skip the personal guarantee, and choose which invoices to fund on your schedule. It’s a straightforward way to unlock cash without turning your back office upside down.
Need a cleaner path to steady cash flow? Contact NowCorp to talk through your options and see how fast, flexible accounts receivable financing can move your business forward.
Call 1-855-966-9435 to learn more.
FAQs
1) Does factoring count as debt?
No. When you factor an invoice you aren’t borrowing money—you’re selling an asset. Because of that, the transaction doesn’t sit on your balance sheet as a loan, there’s no principal to repay, and it won’t inflate debt-to-income ratios that lenders or investors watch.
2) Why is factoring expensive?
Factoring can be costly because of the fees involved. In addition to the discount rate (usually 1-5% of the invoice value), companies may charge processing fees, account maintenance fees, and penalties for late payments. These costs can add up quickly, especially if customers take longer than expected to pay.
However, factoring isn’t your only option. NowCorp offers a more transparent, flat-fee solution without the hidden charges typically seen with factoring companies.
Learn more about NowCorp’s pricing options.
3) Do factoring companies check your credit?
Most factoring companies focus on your customers’ credit rather than your own. Since they are advancing money based on invoices, they want to ensure your clients are creditworthy. However, some companies may still perform a soft credit check on your business to assess risk.
4) How can I avoid risky factoring?
The best way to avoid risky factoring is to choose an alternative solution like NowCorp. We offer fast access to funds with a simple, flat-rate fee. Your customers keep paying you directly, and you maintain full control of your client relationships.
Explore safer alternatives to factoring with NowCorp.
