Invoice Factoring vs. Accounts Receivable Financing

Invoice factoring

You sell a specific invoice (or batch of invoices) to a factoring company at a discount, typically receiving 80-90% of the face value upfront. The factor often takes over collecting payment directly from your client and pays you the remaining balance, minus fees, once the invoice is paid.

• Approval leans almost entirely on your client's creditworthiness, not yours
• Can involve the factor contacting your client directly (notification factoring)
• Often faster to set up for businesses with limited operating history
• Fees are usually charged per invoice, based on how long it stays unpaid

Accounts receivable (A/R) financing

You borrow against the value of your full receivables ledger as collateral, similar to a line of credit. You keep collecting from your own clients and keep that relationship entirely in-house — see our full A/R financing program page for qualification details.

• You retain control of client communication and collections
• Structured more like a revolving credit line than a one-off invoice sale
• Often requires 2+ years in business and stable financials
• Rates can be lower than factoring when your business financials (not just your clients') are strong

Side-by-side

• Who's evaluated: factoring looks mainly at your client; A/R financing looks more at your full business
• Collections: factoring may shift to the factor; A/R financing usually stays with you
• Structure: factoring is invoice-by-invoice; A/R financing is more like a revolving facility
• Best fit: factoring for newer businesses with strong clients; A/R financing for established businesses wanting to keep the relationship in-house

Neither business that runs primarily on card sales or daily deposits instead of invoices — those businesses are usually better served by revenue based financing. Approval and terms for either option are always subject to lender underwriting.

How the costs are calculated

The two products are priced differently, so compare total dollars rather than headline percentages.

• Factoring: you receive an advance (often 80-90% of the invoice), the factor holds the rest as a reserve, and charges a fee based on how long the invoice stays unpaid. When your customer pays, the factor releases the reserve minus its fee.
• A/R financing: you draw against a "borrowing base," which is your eligible receivables (usually excluding invoices more than 90 days old) times an advance rate. You pay interest on what you draw, plus any facility fees.

Hypothetical example, for illustration only: you factor a $50,000 invoice at an 85% advance, so you receive $42,500 upfront. If the fee works out to 3% for each 30 days and your customer pays in 45 days, the fee is 4.5%, or $2,250, and the factor releases the remaining $5,250. The slower your customers pay, the more factoring costs.

Recourse vs. non-recourse factoring

With recourse factoring, you must buy back or replace any invoice your customer doesn't pay. With non-recourse factoring, the factor absorbs the loss if your customer can't pay because of insolvency, but fees are usually higher and the definition of what's covered is often narrow. Read that definition before signing.

What to check in the contract

• Minimum volume and term: some agreements require you to factor a minimum amount each month or charge termination fees if you leave early.
• The UCC lien: both products are governed by Article 9 of the Uniform Commercial Code, which covers sales of receivables as well as loans secured by them. Expect a UCC-1 filing against your receivables; see what a UCC lien means.
• Notification: whether your customers will be told to pay the factor directly.
• Reserve release timing and which invoices are ineligible, such as those from government agencies or past 90 days.

Frequently Asked Questions