Solo Biz Soft Editorial Team Both let you turn unpaid invoices into cash before your customer actually pays, but they work in meaningfully different ways — one involves selling the invoice outright, the other is a loan against it. The difference affects who deals with your customer, what it costs, and whether your customer even knows it’s happening.
How invoice factoring works
You sell an unpaid B2B invoice to a factoring company, which typically advances 80–100% of its value within a day or so. The factor then collects payment directly from your customer and sends you the remaining balance, minus its fee. Fees commonly run somewhere around 1–5% per 30-day period the invoice remains unpaid, with an industry-average discount fee around 2.5% per month — equivalent to roughly 26% annualized, though this varies by industry, customer quality and invoice volume. “Recourse” factoring, where you’re liable if your customer never pays, is generally cheaper than “non-recourse” factoring, where the factor absorbs that risk instead.
How invoice financing works
You borrow against your unpaid invoices rather than selling them. You keep ownership, you collect payment from your customer yourself, and the arrangement is usually confidential — your customer typically never knows it’s happening. Because the lender is extending credit against your business rather than buying a specific invoice and taking on collection risk, this route tends to be priced more like a loan, often in the rough range of 15–25% APR, generally cheaper than factoring.
Which one fits your situation
Factoring tends to suit businesses that want the collections work handled for them and don’t mind customers knowing a third party is involved, or whose own credit isn’t strong enough to qualify for financing on its own (factoring approval leans more on your customer’s creditworthiness than yours). Financing tends to suit businesses that want to keep the relationship with their customer fully in-house and can qualify based on their own credit and invoice volume. Either way, run the real numbers — an effective 26% annualized cost on factoring is a meaningful expense, worth comparing against a business line of credit or standard business loan if your credit profile qualifies for those instead.
Frequently asked questions
Will my customer know I'm using invoice factoring?
Usually yes — the factor typically contacts your customer directly to collect payment, so it’s generally disclosed. Invoice financing is usually confidential instead.
Is invoice factoring based on my credit or my customer's?
Mainly your customer’s, since the factor is relying on your customer actually paying the invoice. This makes factoring more accessible for businesses with weaker credit of their own, as long as their customers are creditworthy.
What happens if my customer never pays?
Depends on the contract. Under recourse factoring, you’re liable to repay the factor if the customer doesn’t pay; under non-recourse factoring, the factor generally absorbs that loss instead, in exchange for a higher fee.
More free tools: Business line of credit calculator · Loan calculator · All free tools
This article is general information, not financial advice. Rates and fees vary significantly by provider, industry and customer credit quality — get a specific quote before committing.
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