You have done the work, sent the invoice — and now the client pays in 60 days. Meanwhile rent is due this week. That cash-flow gap is exactly the problem invoice factoring exists to solve.
What is invoice factoring?
Invoice factoring is selling your unpaid invoices to a third party (a "factor") at a small discount, in exchange for most of the money up front — usually 70–90% within a day or two. The factor then collects the full amount from your client on the due date and pays you the remainder, minus its fee.
It is not a loan: you are selling an asset (the invoice) rather than borrowing against it, so it does not add debt to your balance sheet.
For a fuller explanation, see the guide: Invoice Factoring.
How it works, step by step
- You invoice the client as normal, with standard payment terms.
- You sell the invoice to the factor, which advances you most of its value immediately.
- Your client pays the factor on the invoice due date.
- The factor pays you the balance, minus a fee — typically 1–5% of the invoice value.
When it makes sense
- Your clients are large businesses with long payment terms (30, 60 or 90 days).
- You need cash now for payroll, materials or a new project.
- You have steady, creditworthy customers — factors check your clients' ability to pay.
When it does not make sense
- Your clients already pay quickly — the fee would eat your margin for nothing.
- Your invoices are small and irregular — many factors have minimum volumes.
- You are uncomfortable with a third party contacting your clients about payment. (Some factors offer "non-notification" factoring, but it costs more.)
Factoring vs. invoice financing
People mix these up. With factoring, the factor buys the invoice and collects from your client. With invoice financing, you keep collecting yourself and the invoice is simply collateral for a short-term advance. Factoring is simpler but less discreet; financing keeps the client relationship entirely with you.
Get the invoice right first
Factoring only works on clean, professional invoices — factors will reject invoices with missing details. A free tool such as NexBillio — a free online invoice generator, no sign-up needed — creates a proper PDF invoice in seconds, with your business details, the client's details, line items and tax. It also handles quotes, estimates, receipts and credit notes.
Invoice factoring is a tool, not a habit: useful when a big invoice is stuck in a long payment cycle, but not a substitute for chasing late payers or tightening your own payment terms.
