Invoice Factoring Eligibility Check

Invoice factoring is a financing method that allows businesses to convert unpaid invoices into immediate cash. Instead of waiting 30, 60, or even 90 days for customers to pay, you can sell your outstanding invoices to a factoring company (called a "factor") and receive a significant portion of the invoice value upfront—typically 70% to 90%. When your customer pays the invoice, you receive the remaining balance minus the factoring fee.

This type of financing is particularly valuable for B2B (business-to-business) companies that invoice other businesses or government entities. Unlike traditional loans, invoice factoring eligibility depends more on the creditworthiness of your customers than on your own credit history, making it accessible to businesses that might not qualify for conventional financing.

How Invoice Factoring Works

Understanding the invoice factoring process helps you determine if it's the right solution for your cash flow needs:

1. Submit Invoices: After delivering goods or services to your customer, you submit the invoice to the factoring company instead of waiting for payment.
2. Receive Advance: The factor advances you 70-90% of the invoice value, typically within 24-48 hours. This immediate cash injection helps you cover operating expenses, payroll, or new opportunities.
3. Customer Pays Factor: Your customer pays the invoice according to their normal payment terms, but the payment goes to the factoring company.
4. Receive Remaining Balance: Once the factor receives payment, they send you the remaining balance (the "reserve") minus their factoring fee.

For example, if you factor a $10,000 invoice with an 85% advance rate and a 3% factoring fee, you'd receive $8,500 immediately. When your customer pays, you'd receive the remaining $1,200 ($1,500 reserve minus $300 fee).

Invoice Factoring Eligibility Criteria

One of the most attractive aspects of invoice factoring is that eligibility requirements differ significantly from traditional loans. Here's what factoring companies typically evaluate:

Customer Creditworthiness

Since the factor is essentially purchasing your receivables, they care most about whether your customers will pay. Businesses with creditworthy customers—other established businesses, government agencies, or large corporations—are more likely to qualify. The factor will review your customers' payment histories and credit profiles.

Invoice Quality

Factors prefer invoices that are:

• For completed work or delivered goods (not progress billing or deposits)
• Free from liens, encumbrances, or disputes
• Due within 90 days or less
• Issued to commercial customers (B2B), not consumers

Business Requirements

While less stringent than traditional lending, factors still have some business requirements:

• Time in Business: Many factors work with businesses as new as 3-6 months old
• Minimum Invoice Volume: Some factors require minimum monthly factoring volumes (often $10,000-$25,000)
• Industry: Most B2B industries qualify, though some factors specialize in specific sectors
• No Tax Liens or Legal Issues: Outstanding tax liens or pending litigation may disqualify some businesses

Your Credit Score Matters Less

Unlike traditional loans where your personal credit score is a primary factor, invoice factoring focuses on your customers' ability to pay. Businesses with challenged credit can often still qualify if their customers are creditworthy. This makes factoring an important option for businesses rebuilding their credit or those without extensive credit history.

Costs and Fees of Invoice Factoring

Understanding factoring costs helps you evaluate whether this financing method makes financial sense for your business:

Factoring Fees

Factoring fees typically range from 1% to 5% of the invoice value, depending on:

• Invoice Volume: Higher volumes often qualify for lower rates
• Customer Credit Quality: Better customer credit means lower risk and lower fees
• Industry: Some industries have higher or lower average rates
• Payment Terms: Shorter payment terms typically mean lower fees
• Advance Rate: Higher advance percentages may come with higher fees

Additional Fees to Consider

Some factoring companies charge additional fees:

• Application or setup fees
• Monthly minimum fees if you don't meet volume requirements
• Wire transfer fees for funding
• Invoice processing fees

When comparing factoring costs to other financing options, it's important to understand how to calculate the true cost. Our APR calculator guide can help you compare different financing products on an apples-to-apples basis.

When Invoice Factoring Makes Sense vs Business Loans

Invoice factoring and traditional business loans serve different purposes. Here's how to determine which is right for your situation:

Consider Invoice Factoring When:

• You have creditworthy B2B customers with slow payment cycles
• Your personal or business credit limits traditional loan options
• You need fast access to cash (24-48 hours vs weeks for loans)
• You want to avoid taking on debt
• Your financing needs fluctuate with your sales volume
• You're a newer business without extensive credit history

Consider Traditional Business Loans When:

• You need funds for purposes beyond bridging receivables gaps
• You have strong credit and can qualify for lower interest rates
• You want a fixed payment schedule for easier budgeting
• You don't want customers to know you're using financing
• Your customers are primarily consumers (B2C) rather than businesses

Understanding your gross margins can also help determine if factoring fees are sustainable for your business. Learn more in our business gross margin calculator guide.

Types of Invoice Factoring

Different factoring arrangements offer varying levels of flexibility and risk:

Recourse vs Non-Recourse Factoring

• Recourse Factoring: You remain responsible if your customer doesn't pay. This is more common and typically has lower fees.
• Non-Recourse Factoring: The factor assumes the risk of customer non-payment (within certain conditions). Fees are higher, but you're protected from bad debt.

Spot Factoring vs Contract Factoring

• Spot Factoring: Factor individual invoices as needed without long-term commitments. Offers flexibility but typically has higher per-invoice fees.
• Contract Factoring: Commit to factoring a certain volume over time in exchange for better rates and terms.

Notification vs Non-Notification Factoring

• Notification Factoring: Your customers are informed that their invoices have been factored and should pay the factor directly. This is standard practice.
• Non-Notification Factoring: Customers aren't told about the factoring arrangement. Less common and typically more expensive.

Industries That Commonly Use Invoice Factoring

While many B2B industries can benefit from factoring, these sectors particularly rely on it:

• Transportation and Trucking: Long payment cycles from shippers make factoring essential for fuel and operating costs
• Staffing Agencies: Need to pay employees weekly while waiting 30-60 days for client payments
• Manufacturing: Raw material costs and production expenses require consistent cash flow
• Wholesale and Distribution: Inventory purchases often need to be made before customer payments arrive
• Commercial Construction: Long project timelines create gaps between expenses and payments
• Business Services: Consulting, IT services, and other B2B service providers with corporate clients

If you're exploring other types of financing beyond factoring, you might also consider a business line of credit for flexible ongoing access to capital, or equipment financing if you need to purchase business equipment.

FAQ: Invoice Factoring