Invoice Factoring for Small Businesses | Invoice Financing for Small Business 

Get invoices paid in days for convenient capital. Get back to growing and managing your small business.

WHAT'S IN THIS GUIDE

1. What is Small Business Factoring?
2. What Is Invoice Financing for Small Businesses?
3. How Do Invoice Factoring and Invoice Financing Help Small Businesses?
4. Types of Small Business Invoice Factoring
5. How Does Small Business Factoring Work?
6. How Does Invoice Financing Work?
6. Small Business Invoice Factoring vs Small Business Invoice Financing: Pros and Cons
7. Invoice Financing or Invoice Factoring: Which Is Best for Your Business?
8. The Pros and Cons of Invoice Financing for Small Business
9. Invoice Factoring Costs: How to get the best deal
10. Industry Use Cases for Invoice Factoring Services
11. Why Do Small Businesses Use Invoice Factoring or Financing?
12. Why Small Businesses Factor Invoices with FundThrough
13. What to Look for in a Small Business Factoring Company
14. Small business factoring FAQs

Key summary takeaways: Small business invoice factoring & invoice financing

  • Definition & Benefits of Invoice Factoring: Small business factoring allows companies to sell unpaid invoices at a discount for immediate cash flow, helping them cover expenses, pay employees, and invest in growth without waiting for customer payments.
  • Comparison of Factoring & Financing: Invoice factoring involves selling invoices to a third party, while invoice financing is a line of credit-like arrangement where businesses use invoices as collateral to secure funding, with differences in risk, fees, and customer involvement.
  • Types & Costs of Factoring: Options include spot factoring (choose invoices to fund as needed) and whole turnover factoring (sale of all invoices). Costs vary based on factors like net terms, invoice size, industry, and whether the factoring is recourse (business retains risk) or non-recourse (factor assumes risk).
  • Use Cases & Industry Applications: Factoring is widely used by businesses in industries like trucking, staffing, manufacturing, and wholesale, but is also useful for startups, seasonal businesses, and companies outside of these industries needing rapid access to capital.
  • Choosing the Right Factoring Partner: Key considerations include flexibility, transparency in fees, speed of funding, and customer experience. FundThrough, for example, offers fast funding, no hidden fees, and a seamless QuickBooks integration.

Invoice factoring dates back to ancient Mesopotamia around 2000 BCE, where merchants sold their receivables to financiers in exchange for immediate cash. The more things change, the more they stay the same: today, we have the same cash management problems that small businesses have had for thousands of years–now, we can quantify them. Consider these stats from SCORE for example:

  • 79% of small businesses start out underfunded
  • 82% of SMBs fail due to poor cash flow management
  • 29% run out of cash altogether

 

While typical net terms are 30, 60, or even 90 days, FundThrough client data shows that the average time small businesses like yours have to wait before getting paid is 40 days–a major contributor to general cash management issues as well as specific challenges. The good news? Invoice factoring solves these problems and more. FundThrough’s approach makes it easy, thanks to our online platform and integration with popular accounting software like QuickBooks and OpenInvoice. Continue reading to learn more about small business factoring, small business financing, and whether early invoice payments are right for you.

What is Small Business Factoring?

Small business factoring is a financing method where a business sells its unpaid invoices to a factoring company at a discount. This provides immediate cash flow, allowing businesses to cover expenses without waiting for customer payments. The factoring company collects the full invoice amount from the business’ customer, making a profit on the difference.

What Is Invoice Financing for Small Businesses?

Invoice financing (or receivable financing) is often another term for invoice factoring. It can also be a funding solution where businesses use unpaid invoices as collateral to secure a cash advance. Businesses draw funds up to the amount of approved outstanding A/R, and make scheduled repayments with a pre-determined amount of interest per payment. This improves cash flow without involving the business’ customer.

How Do Invoice Factoring and Invoice Financing Help Small Businesses?

The short answer: Invoice factoring and invoice financing help small businesses by improving cash flow. Factoring provides immediate cash by selling unpaid invoices to a factoring company, while financing offers a line of credit using invoices as collateral. Both solutions reduce cash flow gaps, allowing businesses to cover expenses, pay employees, and invest in growth.

More specifically, these small business funding methods help with:

  • Making payroll. Your financial obligations don’t stop just because you’re waiting on payment from customers. No matter what you’re owed, you’ve still got to pay your employees come payday. We’ve seen many business owners and CEOs stressed out about paying their hard-working employees on time.
  • Seizing growth opportunities. When a big project comes along, you need funding to take it on. Staffing up, buying supplies, and purchasing equipment are key to growing your business and isn’t possible without funding. It’s always a shame when businesses have to turn away large orders or more customers simply due to a lack of cash.
  • Side-stepping bank rejections. If you’re new or don’t have a lot of time in business, you don’t have a financial track record or credit history. Traditional banks view your business as a risk, no matter how well your business is doing. Even if you have established banking relationships, the process of applying for a loan or line of credit increase takes time, and you can still get denied.
  • Purchasing supplies. It can be challenging to fulfil orders or take advantage of bulk purchase discounts when you don’t have enough funding at the right time.
  • Maintaining supplier relationships. Paying your own suppliers on time is key for ensuring a positive rapport that makes them want to keep working with you.
  • Saving time and dollar costs of collecting A/R. Instead of working on your business and growing your company, you or your team is stuck making follow-up calls and sending out notices asking for payment (professionally, of course).

 

Getting your invoices paid in days rather than waiting on lengthy payment terms provides quick, flexible funding without debt or dilution .

Types of Small Business Invoice Factoring

  • Spot factoring: A type of invoice factoring where a business sells a single invoice or a small batch of invoices to a factor for immediate cash, rather than committing to a minimum funding volume. This type of factoring provides the ultimate flexibility.
  • Whole turnover: A factoring arrangement in which a business sells all or most of its accounts receivable to a factoring company on an ongoing basis. This usually requires getting locked into a long-term contract that obligates you to fund.

Recourse vs Non-recourse Factoring

Which one is right for you? Weigh your options with this handy table.

 

Recourse Factoring

Non-recourse Factoring

Definition

A type of factoring where the business remains liable to repay the factor if the customer fails to pay the invoice.

A factoring arrangement where the factor assumes the risk of non-payment, protecting the business from bad debt losses.

Benefits

  • Lower fees
  • Easier customer approval
  • Business protected from bad debt
  • Reduced need for in-house collections

Risks

  • Financial strain if invoices are unpaid
  • Further cash flow issues due to chargebacks or holdbacks of invoices funded in future
  • Higher fees
  • Stricter customer credit requirements
  • Not available with all factoring companies

How Does Small Business Factoring Work?

See this infographic for an example of how invoice factoring works, or the written steps below for a more detailed description:

how invoice factoring works

Here’s a breakdown of the steps involved when you factor an invoice:

Step 1: See if you’re qualified and get a term sheet. You’ll need to submit basic business information and documents for the factoring company to underwrite your business, which might include:

  • Articles of Incorporation /legal proof of business documents
  • Government-issued ID with color photo
  • Void check for your business bank account
  • Recent financial statements

If you accept the terms outlined in the terms sheet, move on to step 2.

Step 2: Underwrite your customer. Submit customer contracts, invoices for funding, and other information and documents as needed for the factoring company to determine whether your customer is creditworthy.

Step 3: Submit and verify invoices. This is when the factoring company will confirm that your invoices have been accepted by your customer for completed work.

Step 4: Your customer signs an NOA. When your customer signs a Notice of Assignment, they acknowledge that the factoring company now owns the invoice, and they must redirect payment. See how we work with your customers.

Step 5: Funds are deposited to your account. If your invoice is approved for funding, you’ll receive a cash deposit to your business bank account, less the factoring fee. You can enjoy peace of mind knowing you have the necessary cash to grow your business and cover any expenses.

Step 6: Your customer pays the factoring company. When the invoice is due, your customer pays the outstanding invoice to the factoring company, and the funding process is complete.

How Does Invoice Financing Work?

Invoice financing allows businesses to borrow money using unpaid invoices as collateral. A lender approves a funding limit, the businesses draws funds as needed, and repays the balance in instalments with a percentage fee added. This improves cash flow without waiting for customer payments. Invoice financing can also be a synonym for invoice factoring.

how does invoice financing work? Invoice financing process

Here’s how the invoice financing process typically works:

1. After getting approved with a lender, you’re given a credit limit.

2. You submit outstanding invoices as collateral.

3. You draw funds up to your limit as needed.

4. You repay the advance in predetermined instalments with an additional fee on an agreed-upon schedule. Sometimes the repayments can start immediately after you’ve received the capital, so ask about when repayments start and ensure you’re prepared accordingly.

Small Business Invoice Factoring vs Small Business Invoice Financing: Pros and Cons

For simple comparison, we’ve broken down the pros and cons of both small business invoice factoring and small business invoice financing so you can decide which one is right for you.

 

Invoice Factoring for Small Businesses

Invoice Financing for Small Businesses

Pros

  • No bank hassles
  • Quick funding
  • Convenient capital
  • Easy process
  • No debt or dilution
  • No commitment after invoice is paid*
  • No customer involvement
  • Can be faster than factoring
  • Convenient capital
  • Easy process

Cons

  • Concerns about customer perception
  • Difficult to record in accounting
  • Heavy admin burden
  • Smaller capital limits
  • Adds debt to balance sheet

*Specific to FundThrough

Invoice Financing or Invoice Factoring: Which Is Best for Your Business?

Pros of Small Business Factoring

There are many benefits when it comes to small business factoring, including:

  • No bank hassles. Bank business loans, traditional loans, and lines of credit are the traditional go-to solution for filling the cash flow gaps that arise from the unpredictability associated with B2B payments. However, banks usually have cumbersome paperwork requirements, won’t work with new businesses, and the funding period can be anywhere between several days to a few months. FundThrough typically reviews applications and provides funding in a few business days. Your customer’s credit is important; not yours.
  • Quick funding. FundThrough can fund invoices in a matter of just a few business days, saving you months of waiting to get paid or waiting on the bank to make a decision. You can get the funding your business needs quickly, then get back to work.
  • Convenient capital. FundThrough uses technology to help streamline and automate the funding process. This makes it quick and easy to get funding from anywhere you have an internet connection.
  • Easy process. With an online factoring company like FundThrough, you don’t have to worry about filling out time-consuming paperwork. Our online system features AI and automation to make things easy. Plus, QuickBooks integration makes it easy for you to get funded in a few clicks, so you can get back to business.
  • No debt or dilution. As a small business owner or CEO, minimizing debt repayments keeps more of your cash available and avoiding dilution let’s you stay in control of your company. Invoice factoring is not a loan and it’s not equity financing, so you don’t have to worry about paybacks or how investors will affect your business as time goes on.
  • No long-term commitment once the invoice is paid. With FundThrough, there’s no minimum number of invoices you need to fund and no maximum funding limit. And, there’s no strings attached after your customer pays their invoice just convenient funding any time you need it.

 

Cons of Small Business Factoring

Like any type of financing, there are some perceived negatives of small business factoring, including:

Like any type of financing, there are some perceived negatives of small business factoring, including:

  • Concerns about customer perception. Many businesses are understandably concerned about the potential impact that working with a factoring company; they worry that their customers might think they’re financially weak, or that the factoring company will sour the relationship by hounding them for payment. However, invoice factoring and redirecting payments is business as usual for many customers. In fact, it is used by many growing and successful companies, and not those in financial straits. If you’re concerned about your customer’s involvement, rest assured we treat your customer like our own.
  • Perception that it’s hard to record in accounting. If you’re unsure of how to account for factor transactions in your accounting software, don’t sweat! We walk you through it step by step (Even if you don’t use QuickBooks for your accounting software, the same principles apply.)

The Pros and Cons of Invoice Financing for Small Business

Before signing a financing agreement, it’s important to be clear on the pros and cons of financing an unpaid invoice and taking on business invoice loans or lines of credit as a source of business funding.

Pros of invoice financing for small business

Some potential advantages of invoice financing for small businesses include:

  • No customer involvement. With invoice financing, customer involvement is not required. This allows you to manage customer relationships without third party intervention.
  • Can be faster than factoring. Since there’s no customer involvement, the approvals process for invoice financing is often quicker compared to invoice factoring and traditional forms of small business funding.
  • Convenient working capital. Invoice financing gets you the cash you need to run your business quickly, solving common cash flow problems with less stress.
  • Easy process. Thanks to AI, automation, and integration with accounting software, invoice financing can eliminate time-consuming paperwork associated with bank loans and other financing options, speeding up your access to working capital.

Cons of invoice financing for small business

Some potential negatives of invoice financing for small businesses include:

  • Heavy admin burden. The biggest difference with factoring vs financing is that you are on the hook for payment, not your clients. You’ll need to keep up with payments, just like if you were paying a bank loan. Depending on your cash flow issues, financing could make the issue worse – not to mention it also takes up time and focus managing accounts receivable and payments that could be better spent on your business.
  • Smaller capital limits. Invoice financing companies typically only offer limited access to funding, which might not be ideal if your business needs a larger boost of capital to bridge cash flow gaps such as covering operating expenses or to staff up for big projects.
  • Adds debt to your balance sheet. Since invoice financing is basically a loan, it counts as a liability on your books and adds debt to your balance sheet.

Invoice Factoring Costs: How to get the best deal

Invoice factoring rates vary between 1% and 6% – a wide range. Types of pricing, certain pricing criteria, and the factoring company’s pricing strategy effect the final amount you’ll pay.

The Factors That Determine Invoice Factoring Costs:

  • Net term length. Shorter terms mean lower rates.
  • Invoice size. Some companies might offer lower rates for large invoices.
  • Industry. Higher risk industries can come with higher rates.
  • Recourse vs non-recourse factoring. Non-recourse tends to be more expensive because of the risk the factoring company takes on.
  • Pricing strategy. Does the company charge one fee or an initial discount rate (also known as transaction rate) plus additional fees? More on that next.

 

Hidden Factoring Fees

The most important point to remember when comparing pricing between invoice factoring companies is that the rate is not the whole cost. Hidden fees can hide behind a low rate. A few examples of fees you could encounter include:

• Initial setup fee: 1% of facility

• Monthly usage monitoring fee: $100 per payor

• Additional fee for 90+ day net terms: 1% of invoice amount

• Early invoice payment fee: 0.5% of invoice amount

• Overpayment fee: 1% of overpayment amount, if client’s customer overpays their invoice

• Return check fee: $100

• Same day funding fee: $500

 

Pricing Structures: Invoice Factoring Examples

  • Flat rate: the factoring company charges a flat percentage per invoice by its net term length. This is how FundThrough prices invoice factoring. Here’s how it works:
    • Invoice face value: $100K
    • Net terms: 30 days
    • Invoice factoring rate: 2.75% per 30 days
    • Total fees, assuming on-time payment: $2,750

 

  • Daily rate: When an invoice funding company uses a daily rate, the arrangement comes with an advance rate. An advance rate is a percentage of the invoice that is advanced to you immediately, while the remainder is paid to you after your customer pays less the factoring compay’s fee. Typical advance rates vary between 75% and 95%.

 

For a simple example, let’s say they send you 80 percent of the invoice value immediately and hold back the remaining 20 percent. The daily fee would begin to accrue from the day of the advance and would stop accruing once your customer pays. Your partner then sends the remaining 20 percent less the accrued fee amount. Here’s a breakdown of how this works:

    • Invoice face value: $100,000
    • Net terms: 30 days
    • Advance rate: 80%, for an immediate payment of $80,000
    • Hold back: 20%, a.k.a., $20,000
    • Daily factoring rate: 2.75%/30 days = 0.09167% per day
    • Total fees, assuming on-time payment: $2,750
    • Remitted amount: $17,250, once payment is received

 

Industry Use Cases for Invoice Factoring Services

The most common industries that use factoring include oil and gas, trucking and freight, staffing, and manufacturing. However, many industries and types of businesses can benefit from factoring as well, like these examples:

  • Startups: Invoice factoring helps startups improve cash flow by providing immediate capital from unpaid invoices, allowing them to cover operational expenses, invest in growth, and manage payroll without waiting for customer payments.
  • Seasonal Businesses: Businesses with fluctuating revenue, such as holiday retailers or tourism-based companies, can use invoice factoring to maintain steady cash flow during off-seasons and prepare for peak demand periods.
  • Wholesale: Wholesalers often extend long payment terms to buyers, which can strain cash flow; factoring enables them to receive funds upfront, ensuring they can purchase inventory and fulfill large orders without financial delays.
  • Retail: Retailers can use factoring to bridge the gap between purchasing inventory and receiving revenue from sales, helping them stay stocked and manage operational costs efficiently.
  • Automotive: Auto repair shops, parts suppliers, and dealerships benefit from factoring by converting unpaid invoices into immediate working capital, allowing them to cover labor costs, buy inventory, and manage cash flow effectively.

Why Do Small Businesses Use Invoice Factoring or Financing?

Small businesses use invoice factoring or financing to bridge cash flow gaps arising from slow-paying customers.

Slow payments affect your small business in two significant ways:

  • They make it difficult to pay your bills and creditors on time, which puts your credit rating at risk.
  • They limit you from harnessing growth opportunities.

With the near-instant access to cash that invoice factoring offers, you can maintain positive credit ratings and a healthy cash turnover rate. Some ways factoring helps include:

  • Making payroll. One of the most common reasons to factor an invoice is to get quick cash upfront to cover payroll. However, you can factor an invoice for any expense; it’s certainly not limited to payroll.
  • Funding growth. Many of our clients fund invoices so that they can pay upfront costs associated with landing a big contract or taking on more customers.
  • Increasing peace of mind. If you’re like most business owners, you probably worry about your cash flow. Having a business funding option like factoring that’s always available ensures you don’t have to worry about meeting your financial obligations. You also don’t have to worry about payment collection, as the factoring company works with your customer to redirect payment. A good factoring company will contact you before reaching out to your customers in the event of late payment.
  • Debt-free financing. Invoice factoring is not a loan, which means that you’re not taking on expensive debt when you fund an invoice. You’re also not borrowing funds, you’re getting an advance on your invoice for work you’ve already completed.
  • Non-dilutive funding. Not only is invoice factoring debt-free financing, it’s also non-dilutive funding meaning you’re not giving up any equity in your business!
Supplying nutritious snack bars to grocery chains across Canada, Made with Local Owner and Founder, Sheena Russell came to FundThrough because they needed to get paid faster. They partnered with FundThrough to ensure that their local honey and fruit farmers were getting paid asap, and to confidently expand to over 450 stores across Canada.
READ CASE STUDY →

Why Small Businesses Factor Invoices with FundThrough

One quick search in Google or ChatGPT will show you that there are plenty of factoring companies to choose from. Businesses like you choose us for:

  • Speed: Get same day funding (after first funding)
  • Low commitment: You’re not required to sign a contract obligating you to a minimum required funding volume. No obligations after your customer pays.
  • Flexibility: Choose the invoices you want to fund (aka spot factoring)
  • Unlimited funding: For as much as you have in eligible invoices
  • 100% advance rates: Get all your invoice value upfront minus one fee
  • No hidden fees: Transparent pricing means one flat fee and no hidden fees
  • Dedicated support: To help you proactively manage your cash flow
  • Simple online application: Send us all your information in the secure FundThrough platform
  • Optional QuickBooks and OpenInvoice integration: Pull invoices eligible for funding into your account so you can submit them in one click (after customer setup)
  • Cross border factoring: We can fund invoices to Canadian or U.S. customers
  • Professional treatment of your customers: Our trained team works with your customers to apply and collect payments in a friendly way. We always contact you before contacting your customer.
  • 4.6 stars on Google Reviews: Hundreds of clients are thriving with quick cash flow
  • Named Best Overall Factoring Company 2025 by Forbes Advisor: Recognized for how we approach getting you paid early

 

What to Look for in a Small Business Factoring Company

Experience with small businesses. The definition of small business is wide. The Small Business Administration in the U.S.defines it as employing fewer than 1,500 people with a max revenue of $41.5 million. You need a partner who can work with businesses at different stages and sizes, and understands your needs at every stage of growth.

  • Flexibility. The best invoice factoring companies will offer flexibility in how they handle your business, listening to your unique needs. Additionally, you want a factoring business that lets you fund on your terms no funding obligations, no maximums, and no long-term commitments once the invoice is paid.
  • Quick and Efficient. The best small business factoring companies use technology and automation to make getting funded a seamless process. FundThrough’s invoice finance for small business platform boasts QuickBooks integration, automatically pulling in eligible invoices so you can get funded in just a few clicks.
  • Fee Transparency: Different factoring companies charge different funding rates, meaning the cost of invoice factoring varies. But not all companies are upfront about hidden fees – like initial account setups fees, service fees, or transaction fees – that can leave you with less funding than you planned for.

Small Business Invoice Factoring FAQs

Is invoice factoring a loan?

Invoice factoring is not a loan. It is a financial transaction where a business sells its unpaid invoices to a factoring company at a discount in exchange for immediate cash. Unlike a loan, factoring does not create debt, and approval is based on customer creditworthiness, not the business’s credit.

Is Invoice Factoring Right for my Small Business?

In general, invoice factoring is right for your business if you suffer from cash shortfall due to invoices’ slow payments . That equals paid invoices on time in a short time frame.

Still, as with most business decisions, there are considerations. Some include:

  • Do you need quick access to working capital?

The best part of invoice factoring is quick accessibility. If you cannot afford to wait out the typical 30 to 90 days waiting period, invoice factoring offers a short-term financing Do you have a timely opportunity that requires capital?

This could be a big project or a chance to buy in bulk. If you need cash to take on the opportunity, invoice factoring for small business could be right for you.

  • Did the bank reject you or refuse to raise your limit?

If the bank won’t work with you because you don’t have a long enough financial track record, because you need more capital than they’re comfortable with, or if you can’t wait months for an approval, invoice factoring could be right for you.

  • Are your customers credit-worthy?

If your customers are established businesses with strong credit, factoring companies are more likely to approve them, making it more likely for you to get invoices paid quickly.

Am I a good candidate for invoice factoring?

You are a good candidate for invoice factoring if your business has unpaid invoices from creditworthy customers, needs immediate cash flow, and lacks access to traditional loans. Factoring works best for businesses with consistent sales but cash flow gaps. High fees or customer interactions with the factor may be downsides.

What is recourse and non-recourse factoring?

Recourse factoring is an invoice factoring agreement that stipulates the client is required to buy back any unpaid receivables from the factor after a specified period of time. The risk stays with the client.

With non-recourse factoring, the factor takes on the obligation of absorbing any accounts receivables that remain unpaid, so the client is at no risk. Non-recourse factoring is often more expensive than recourse.

Our Approach to Working with Different Industries

FundThrough pays invoices in days for industries outside of this list as well.

Small Business Invoice Factoring FAQs

Your questions answered.

Factoring rates vary between 1% and 6%, depending on a combination of factors, including:

  • The size of your invoice. Some factors charge lower fees for larger invoices.
  • How fast your customers pay. Because factoring companies charge a fee per month, fast-paying clients can lower your factoring cost.
  • Your customer. Your customer’s creditworthiness (and credit risk) can have an impact on your invoice factoring rates.
  • Industry. Some small business factoring companies will charge more for industries that are perceived to be higher risk.

No, invoice factoring isn’t a loan. In an invoice factoring arrangement, you’re selling your invoices to the factoring company at a discount for upfront cash. Your customer pays the factoring company, rather than you paying back borrowed capital.

Invoice financing and factoring are similar in that they both allow you to use unpaid invoices as collateral to access cash, but how they work With invoice financing, a factoring company gives you cash for your unpaid invoices, and you are responsible for repaying the factoring company yourself. The terms include an agreed-upon repayment schedule, with a fee spread out across the payments. Your customer pays you according to the established payment terms.
With invoice factoring, you’re selling your unpaid invoices to a factoring company for a cash advance of the value of the invoice. You get cash for the invoice amount, less any fees, in a few business days. Instead of paying you, your customer pays the invoice amount to the factoring company according to the original payment terms. The key thing to keep in mind is that when you finance invoices, you have to make sure cash is available whenever a payment is due to the factoring company. When you factor invoices, you don’t have to keep as close of an eye on your accounts because the fee has already been withheld from the advance.

Recourse factoring is an invoice factoring agreement that stipulates the client is required to buy back any unpaid receivables from the factor after a specified period of time. The risk stays with the client.

With non-recourse factoring, the factor takes on the obligation of absorbing any accounts receivables that remain unpaid, so the client is at no risk. Non-recourse factoring is often more expensive than recourse.

Quick, Easy Small Business Invoice Factoring

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