Loan types

Invoice factoring, and why your customer's credit matters more than yours

Factoring sells your receivables, it does not lend against them. Here is $250,000 of invoices priced four ways, and the contract clauses that cost owners the most.

5 minute readUpdated 2026-07-29Written by the Exp Capital desk

Factoring is not borrowing. You sell an invoice to a factor at a discount and they collect it from your customer. That legal difference drives everything else about the product: there is no interest rate, the underwriting looks at your customer instead of you, and a business with two months of history can qualify if its customers are strong.

The shape of the deal is always the same. The factor advances most of the invoice face immediately, holds the rest as a reserve, collects from your customer on the normal due date, then releases the reserve to you minus its fee. Two numbers define the whole thing: the advance rate and the discount fee.

One invoice, start to finish

A $250,000 batch, run through the math

You invoice $250,000 on net 45 terms. At an 85 percent advance rate, $212,500 hits your account within a day or two of submitting the batch. The factor holds $37,500 as reserve. Your customer pays the factor on day 45. The factor takes a 3 percent discount fee, which is $7,500, and releases the remaining $30,000 to you.

A $250,000 batch at an 85 percent advance and a 3 percent fee

You received $242,500 on a $250,000 batch, and you got 88 percent of it 45 days early. Now annualize it honestly: $7,500 of cost on $212,500 of cash for 45 days works out to roughly 28.6 percent a year. That is a real cost of capital, well below advance products and well above bank paper.

The same 3 percent fee, at different days to pay
Customer pays on	Fee	Cost on cash advanced	Annualized
Day 30	$7,500	3.53 percent	About 42.9 percent
Day 45	$7,500	3.53 percent	About 28.6 percent
Day 60	$7,500	3.53 percent	About 21.5 percent

Read that table twice, because it is counterintuitive. With a flat fee, slow paying customers make your annualized cost go down, not up. With a tiered fee that steps up every 15 or 30 days, the opposite happens and a slow payer is expensive. Which structure you are on is the first thing to establish, and it depends entirely on your customers' days sales outstanding.

Advance rate and fee move together

Factors trade one against the other, so comparing quotes on advance rate alone is meaningless. A 93 percent advance at 1.5 percent and an 80 percent advance at 3.5 percent are aimed at completely different businesses.

Cash in hand day one from $250,000 of invoices, annualized at day 30

The high advance and low fee end of that range is for clean, diversified receivables from creditworthy commercial or government customers, typically at real volume. The low advance and high fee end covers concentration, disputes, weaker debtors, or small monthly volume. If your quote sits at the bottom of the range, ask specifically which of those factors is driving it, because concentration and debtor quality can be fixed and volume improves on its own.

What underwriting actually looks at

This is the part that makes factoring available where nothing else is. The factor is buying your customer's obligation to pay, so your customer's credit carries the file.

Debtor credit. Who owes the money, and do they pay. A new company invoicing a national retailer or a government agency can factor. The same company invoicing three shaky startups cannot.
Customer concentration. Most factors cap any single debtor at 20 to 40 percent of the portfolio. One customer at 70 percent of your book will either be capped or priced for. See customer concentration.
Invoice age. Factors buy current receivables. Anything past 90 days is usually excluded outright, and anything already past due at submission is a hard conversation.
Whether the work is done. Factoring buys completed, delivered, undisputed invoices. Progress billings and pre bills are a different product. If you need money before the work happens, look at purchase order financing.
Existing UCC filings. A prior blanket lien on your receivables has to be released or subordinated before a factor will fund. This is the single most common reason a factoring deal stalls at the last step.
Your own history, a little. Open tax liens, bankruptcy, and a pattern of customer disputes all matter. Personal credit matters far less here than on any other product.

What a factor reads before quoting you

Notice what is not on that list. Your revenue trend, your average daily balance, and your time in business barely move the needle. This is the only product in the market where a two month old company with one excellent customer prices better than a ten year old company with five weak ones. If your business sells to other businesses on terms, that asymmetry is worth understanding before you apply for anything else.

Recourse, notification, and the words that matter

Recourse factoring: If your customer never pays, you buy the invoice back or swap in another one. Cheaper, and the standard arrangement. The credit risk stays with you.
Non-recourse factoring: The factor absorbs the loss if your customer goes insolvent. It is narrower than it sounds: non-recourse usually covers credit failure only, not disputes, short pays, deductions, or your own performance problems.
Notification: Your customer receives a notice of assignment and pays the factor directly, usually into a lockbox. This is standard and most commercial customers see it constantly.
Non-notification: Your customer never learns you are factoring. Reserved for stronger, larger accounts and priced accordingly.
Misdirected payment: If your customer pays you instead of the factor and you deposit it, you have broken the agreement. Most contracts carry a penalty for this. Forward it immediately and untouched.

One structural point owners miss. Because the factor takes a first position lien on all receivables, factoring and a receivables backed line of credit cannot usually coexist. Choosing a factor is choosing what secures your working capital for the length of the contract, which is another reason the term and notice period matter as much as the fee.

Where it sits against everything else

Where factoring sits on speed and cost

Factoring occupies a specific slot: fast, moderately priced, and available to businesses that cannot get anything else, provided they invoice solid commercial customers. It funds in one to three days after setup, versus weeks for a line of credit. Against a merchant cash advance it is dramatically cheaper and slower to start. Against invoice financing, the difference is ownership: financing lends against the invoice and leaves collections with you, factoring buys the invoice and takes collections over.

What Exp Capital does with this

Exp Capital Solutions is a broker. We do not buy invoices, set advance rates, or collect from your customers. What we do is look at your aging report, tell you honestly what your debtor mix will support, and put the file in front of factors who actually work your industry, because a trucking factor and a staffing factor price the same aging report very differently. We read the agreement with you and flag the term, the minimum, the notice period, and the termination fee before you sign. When a line of credit is cheaper and you qualify for one, we say so, even though the factoring deal pays us more.

Questions people actually ask

Is invoice factoring a loan?

No. It is the sale of a receivable at a discount. There is no interest rate and no repayment schedule, because you are not borrowing. That is why factors underwrite your customers instead of you, why a young business can qualify, and why factoring generally does not appear as debt on your balance sheet the way a loan does.

Will my customers know I am factoring?

In most arrangements, yes. Notification factoring sends your customer a notice of assignment and directs payment to the factor's lockbox. Commercial customers see this constantly and it rarely causes a problem. Non-notification programs exist for larger, stronger accounts and cost more, because the factor gives up direct control of collection.

What credit score do I need to factor invoices?

Personal credit is a minor factor here and there is no meaningful cutoff. What decides the deal is who owes you money and whether they pay. Open tax liens, an active bankruptcy, or an existing blanket lien on your receivables matter far more to a factor than your FICO score does.

What happens if my customer never pays the invoice?

Under recourse factoring, which is the standard, you buy the invoice back or replace it with another one after a set period, commonly 60 to 120 days. Under non-recourse, the factor absorbs a loss caused by your customer's insolvency, but not one caused by a dispute, a short pay, or your own performance.

How much does invoice factoring cost?

Commonly 1 to 3.5 percent of invoice face for the first 30 days, with advance rates of 80 to 93 percent. On $250,000 of invoices at 85 percent and 3 percent, you get $212,500 immediately and pay $7,500, which annualizes to roughly 29 percent if the customer pays on day 45. Watch monthly minimums, which raise the real cost on low volume.

Can I factor just one invoice?

Some factors offer spot factoring for a single invoice, usually at a higher fee because there is no volume to spread setup and diligence across. Most standard programs require you to submit all invoices from selected customers and carry a monthly minimum. Decide which model you want before you sign, since switching means terminating a contract.

Keep reading

Factoring vs invoice financingSelling the receivable against borrowing against it.Accounts receivable agingThe report that gets you quoted, line by line.