Invoice factoring is selling your unpaid B2B invoices to a factoring company for cash now. The factor advances most of the invoice value upfront, typically 70% to 90%, holds the rest as a reserve, and collects from your customer. When the customer pays, you receive the reserve minus the factor's fee, commonly 1% to 5% of the invoice.
Three numbers decide what factoring actually does for you: the advance rate, the reserve, and the fee schedule. Here's how each works, followed by a full worked example.
How does invoice factoring work, step by step?
- You deliver the work and invoice your customer as usual, for example on net-30 or net-60 terms.
- You submit the invoice to the factor along with proof the work was delivered, such as a signed delivery receipt, timesheet, or bill of lading.
- The factor verifies the invoice and checks your customer's credit. Your customer's ability to pay matters more than your own credit score.
- Your customer receives a notice of assignment instructing them to send payment to the factor instead of to you.
- The factor advances cash to you, usually within 24 to 48 hours once your account is set up.
- Your customer pays the factor on its normal schedule.
- The factor releases the reserve, minus its fee, to you.
First-time setup takes longer than later invoices, often 3 to 5 business days, because the factor reviews your business, your customers, and any existing liens. After that, each new batch moves quickly.
What are the advance rate and the reserve?
The advance rate is the percentage of the invoice paid to you upfront. The reserve is the remainder, held back until your customer pays. They always add up to 100%.
| Advance rate | Reserve held | On a $50,000 invoice, you get upfront |
|---|---|---|
| 90% | 10% | $45,000 |
| 85% | 15% | $42,500 |
| 80% | 20% | $40,000 |
| 70% | 30% | $35,000 |
The reserve protects the factor if your customer short-pays, takes a credit, or pays late. It isn't a fee. It comes back to you, less the factoring fee, once the invoice is paid.
Advance rates run higher in industries with clean, verifiable invoices and reliable customers, such as trucking and staffing. They run lower when invoices are more likely to be disputed or partially paid, such as in construction with retainage. Through Sagamore's lending partners, advances reach up to 90% of invoice value.
How are factoring fees calculated?
The fee, also called the discount rate, is a percentage of the invoice's face value. Factors use two main structures.
Flat fee. One percentage regardless of how long the customer takes, within a set window. Simple to predict, but you pay the same whether your customer pays in 10 days or 55.
Tiered or time-based fee. A base percentage for the first period, then an added increment for each additional block of days. A fast-paying customer costs less. A slow one costs more.
Fees commonly land between 1% and 5% of the invoice. Your rate depends on your monthly volume, your customers' credit and payment speed, invoice size, and whether the arrangement is recourse or non-recourse.
Worked example: factoring a $50,000 invoice
Say a commercial cleaning company invoices a property management firm $50,000 on net-45 terms. It factors the invoice with these illustrative terms. They are not quotes; actual terms vary by factor and by your customers.
- Advance rate: 85%
- Fee: 2% for the first 30 days, plus 1% for each additional 15 days or part of 15 days
Day 1: The factor advances 85% of $50,000 = $42,500. It holds $7,500 in reserve.
Day 42: The property manager pays the factor the full $50,000. The invoice was outstanding 42 days: the first 30 days, plus one partial 15-day block. The fee is 2% + 1% = 3%, or $1,500.
Reserve release: $7,500 − $1,500 = $6,000 sent back to the cleaning company.
Total received: $42,500 + $6,000 = $48,500 on a $50,000 invoice. The cost of getting $42,500 about six weeks early was $1,500.
How payment timing changes the cost
The same invoice under the same fee schedule, paid on different days:
| Customer pays on day | Fee % | Fee | Reserve returned | You receive in total |
|---|---|---|---|---|
| 25 | 2% | $1,000 | $6,500 | $49,000 |
| 42 | 3% | $1,500 | $6,000 | $48,500 |
| 60 | 4% | $2,000 | $5,500 | $48,000 |
| 90 | 6% | $3,000 | $4,500 | $47,000 |
With a tiered schedule, your customers' payment habits are part of your price. A customer who pays on day 60 instead of day 30 doubles your cost on that invoice.
What does factoring cost as an annual rate?
Factoring fees look small because they're quoted per invoice, not per year. To compare factoring with a loan, convert it.
In the day-42 example, the company paid $1,500 to use $42,500 for 42 days.
- $1,500 ÷ $42,500 = 3.53% for 42 days
- 3.53% × (365 ÷ 42) = about 30.7% annualized
That's more expensive than most bank credit, and it's the right number to hold against alternatives. It doesn't make factoring a bad choice. A business that can't make payroll without it, or that would turn down a profitable contract, may come out well ahead. But the per-invoice fee shouldn't be mistaken for an annual rate. The same logic applies to any product quoted as a flat fee or factor rate rather than an APR.
What is the difference between recourse and non-recourse factoring?
The difference is who absorbs the loss if your customer doesn't pay.
| Recourse factoring | Non-recourse factoring | |
|---|---|---|
| If the customer never pays | You buy the invoice back or replace it with another | The factor absorbs the loss, typically only for customer insolvency |
| Fee level | Lower | Higher |
| Advance rate | Often higher | Often lower |
| Approval | Easier | Stricter on customer credit |
| Covers disputes over your work | No | No |
Recourse factoring is more common and cheaper. Non-recourse is credit protection on your customers' finances, not protection against disputes about your work. Read the definition of a "credit event" in the agreement closely.
What other fees should you ask about?
The discount fee is the main cost but rarely the only one. Before signing, ask for a written list covering:
- Application, setup, or due diligence fees
- Per-invoice processing fees
- ACH or wire fees for each advance
- Monthly minimum volume requirements, and the charge if you fall short
- Contract length and early termination fees
- Fees for invoices that go past 90 days
Two factors quoting the same discount rate can differ widely in what you actually pay once these are added up.
Which businesses use invoice factoring?
Factoring fits businesses that invoice other businesses or government agencies and wait 30 to 90 days to be paid:
- Trucking and freight: fuel and driver pay are due long before shippers pay.
- Staffing: weekly payroll against monthly client payments.
- Manufacturing and wholesale: raw materials bought months before customers pay.
- Commercial services: cleaning, security, and facilities companies billing on net-45 or longer.
- Government contractors: reliable payers with slow payment cycles.
Because factors underwrite your customers, factoring is often reachable for businesses that are young or still building credit. Sagamore's lending partners generally look for at least 4 months in business, a credit score of 500 or higher, and $5,000 or more in monthly invoicing to creditworthy commercial or government customers. Factoring facilities through our partners range from $10K to $5M.
Is factoring the right fit, or is there a better option?
Factoring suits businesses whose main constraint is the gap between invoicing and getting paid, and whose customers are stronger credits than the business itself. If you'd rather keep collections in-house and your customers unaware of the arrangement, accounts receivable financing lends against invoices without selling them, though qualification is typically stricter. If your gap is occasional rather than constant, a line of credit may cost less.
To see what factoring would look like on your invoices, you can start an application with a recent aging report and a few sample invoices on hand.
