Invoice Factoring for Small Businesses

What it is and how it works.

application process and fast funding

$15 Billion
delivered to U.S. businesses

A+ Rating
with the Better Business Bureau

What is invoice factoring?

Invoice factoring lets you sell your company’s outstanding invoices at a discount to a third party (known as a “factoring company” or “factor”). When you sell your invoices, you receive an advance on your profits instead of waiting for your customers to pay. This provides cash up front for a business to use.

With invoice factoring, your outstanding invoices are owned by the invoice factoring company. The invoice factoring company then collects directly from the customers and earns a profit on the difference between the discounted rate they bought your invoices at (or their “factoring fee”) and the full amount they collect from the customer. You may also hear invoice factoring referred to as “accounts receivable financing.”

The factoring fee charged for invoice factoring will depend on considerations such as your industry, your customers creditworthiness and the type of factoring agreement you sign. As an example, say you have a $10,000 invoice. The factoring company will agree to buy it for $9,600 ($10,000 minus a 4% factoring fee). They give you a cash advance of 80% of the agreed upon amount up front ($7,680). After they collect the invoice they’ll deposit the other $1,920 you’re owed into your bank account.

How does invoice factoring work?

Online factoring companies have used technology to make the process easier and more streamlined. The process will typically follow the steps below.

  • Step 1

    Sign contract.

    If your business and your invoices qualify and you make it through the approval process, you’ll sign an invoice financing agreement with the factoring company. This agreement will establish the maximum amount you can be advanced and will specify which invoices you want to factor.

  • Step 2

    Customers are notified.

    The factor will usually send what’s called a “notice of assignment” to those customers whose invoices you are factoring. The notice lets them know your company has chosen to have the factor collect their outstanding invoices.

  • Step 3

    Receive an advance.

    Depending upon the factor, the industry you’re in, the invoices and other risk factors, you’ll typically receive a cash advance rate of between 70% and 90% of the value of the invoices. No agreement is the same, so you should make sure you understand the specific terms before you sign anything.

  • Step 4

    Invoices are collected.

    Once the factor collects the payments, they’ll pay the remaining balance owed to you, minus their factoring fees and other additional fees. Every factor is a little different, and as mentioned above, the factor rate varies depending on a number of considerations.

OnDeck offers alternatives to invoice factoring to fit your needs.

OnDeck Line of Credit

A revolving credit line you can draw from 24/7 to receive funds within seconds.*

  • Credit limits from $6K - $100K
  • Flexible repayment terms of 12, 18 or 24 months
  • Great for smaller ongoing expenses

OnDeck Term Loan

A one-time lump sum of cash with an eventual option to apply for more.

  • Loan amounts from $5K - $250K
  • Repayment terms up to 24 months
  • Great for larger one-time expenses

The benefits of OnDeck’s small business financing.

No hard credit pulls

Check your eligibility without affecting your credit score.

Fast funding

Lines of credit can fund instantly.* Term loans can fund the same day.

Build business credit history

We report to business credit bureaus, which helps build business credit history with on-time payments.

Learn more about invoice factoring.

No, invoice factoring is not a loan. Instead, you’re selling your accounts receivable to a third party financing company known as a factor or invoice factoring company.

Invoice factoring providers typically charge between 1% and 5% of the invoice value in factoring fees. The percentage depends on conditions like invoice amount, sales volume, your clients’ creditworthiness and what kind of agreement you signed.

Like most types of business financing, invoice factoring has benefits and disadvantages. Before deciding what kind of small business financing is right for you, consider the following.


  • It can offer you quick access to cash when your business needs it.
  • It’s often easier to get approved for than a traditional bank loan.
  • It won’t impact your business credit.


  • You lose out on a percentage of your profits.
  • Hidden fees and other costs are common from less trustworthy factoring companies.
  • You could have to pay the invoices if you have a recourse factoring agreement and your clients don’t pay their invoice.
  • Interest is not tax deductible.

Before you agree to factor your invoices, you should be aware that there are two types of factoring.

Recourse factoring. This type of factoring agreement requires you to pay the factoring company for any invoices they are unable to collect within a reasonable amount of time. This is the more common form of factoring in the United States.

Non-Recourse factoring. With this kind of factoring agreement, the factoring company assumes all the risk for uncollected or unpaid invoices. As a result, the factoring fees are typically higher.

While factoring could be a good way to access working capital to overcome short-term cash flow needs, it’s not a viable option for all businesses. Your business needs to bill on invoice to be eligible. Also, factors often only work with specific industries, so if you’re not in those industries you’ll likely have a hard time finding invoice financing. Here are some alternative financing options.

Business line of credit. A business line of credit is a form of revolving credit. It functions similarly to a credit card. Your lender will approve you for a credit limit that you can borrow against when you need the funds. As you repay, those funds become available to be borrowed again. It’s great for keeping funds on hand to help you cover cash flows and operating costs.

Business term loan. A business term loan can provide you with an upfront lump sum payment that you can repay over time. It’s great for covering large one-time expenses and funding business growth.

Business credit card. A business credit card can help you cover the more common day-to-day expenses of running a small business. They typically have a much higher limit than a personal credit card and it helps you keep your personal credit score protected from the ups and downs of entrepreneurship.

Industries that bill on invoice and need to cover operating expenses quickly may benefit from invoice factoring. Here are a few examples.

Trucking and transportation companies. Trucking and other transportation companies may use invoice factoring to help cover payroll, fuel costs and other expenses while they’re waiting for clients to pay for their shipment. It can help them keep their fleet moving and on the road.

Landscaping companies. Landscaping companies still need to cover operating costs while waiting for their clients to pay. Buying equipment, supplies, covering transportation costs and paying their crew are just a few costs they need to keep up.

Contractors. Contractors may need to wait until a job is complete before they see the full amount they’re owed. Invoice factoring can help them cover cash flow gaps and keep their teams working while they’re waiting to get paid.