Last Updated January 28, 2026
Need Cash Quickly?
One of the most common issues facing small businesses are cash flow problems. Whether it’s caused by customers not paying on time or a reduction in sales, a lack of cash on hand can derail your company’s progress.
Thankfully, you have financing options to keep your business rolling, regardless of your business’s size, age, or creditworthiness.
Accounts receivable factoring is one of these financing options that can provide the cash you need. But what is AR factoring, how much does it cost, what are its qualification requirements and how does it work? Continue reading to find out.
Key Takeaways
- Accounts receivable factoring, also called invoice factoring, helps small businesses solve cash flow problems by turning unpaid invoices into immediate working capital.
- AR factoring provides fast access to cash without traditional loans, credit checks, or collateral, making it ideal for startups, growing companies, and businesses with limited credit history.
- The accounts receivable factoring process is simple and predictable, submit invoices, receive up to 90% upfront, factor manages collections, get the remaining balance minus fees once customers pay.
- AR factoring costs typically range from 0.5% to 5% and depend on factors like industry risk, invoice size, customer credit strength, payment timelines, and recourse vs non-recourse terms.
- Accounts receivable factoring supports business growth by covering payroll, materials, and operating expenses so companies can accept new clients and better manage growth.
What Is Accounts Receivable Factoring?
Accounts receivable factoring, also known as invoice factoring, is a type of business funding that helps companies cover cash deficits based on unpaid invoices. This type of financing is attractive because it can be structured to accommodate business needs, especially for smaller companies.
By financing existing invoices, a company can start on new jobs to ensure a constant stream of cash while still waiting for payment from previous clients. It alleviates the need to wait for customers to pay to take on new business, which is a common dilemma for new and growing businesses.
How Does Accounts Receivable Factoring Work?
Accounts receivable factoring is essentially a 5-step process:
1. Factoring Company Takes Over Collections
Once you sign a factoring agreement, the factoring company assumes responsibility for collecting payment on your invoices. Your customers submit payments directly to the factor instead of paying your business.
2. You Submit Invoices to the Factor
After completing work and invoicing your customer, you forward the invoice to your factoring company. This step initiates the funding process and confirms the invoice is eligible for an advance.
3. You Receive an Immediate Cash Advance
The factoring company advances a large portion of the invoice value, typically up to 90% and within 24 hours of submission. This gives your business fast access to working capital without waiting for customer payment.
4. Factoring Company Manages Payment Tracking
Your factoring company monitors each invoice and follows up with customers as payment comes due. This reduces administrative work while ensuring payment progress stays on track.
5. You Receive the Remaining Balance Once the Customer Pays
Once the customer pays the invoice in full, the factor releases the remaining funds to your business. The final payment reflects the invoice balance minus the agreed-upon factoring fee.
Example of Accounts Receivable Factoring
Since this is a unique financing method, you might feel intimidated by the AR factoring process. However, factoring is truly less involved than other financing options.
To better understand how it works, let’s take a look at an example from the beginning to the end of the process.
Alpha Business handles commercial roofing. To start an order, the company pays its crew and purchases all necessary supplies for the job. Once the team completes the job, the company waits for inspection and invoices the customer. It can take days for the inspection and another 90 days for the customer to pay.
In the meantime, Alpha Business has a new client requesting work. The new client wants Alpha Business to start immediately. However, the company hasn’t received payment from the first customer and lacks the money to start the new job.
As you can imagine, turning down work is problematic for several reasons. So, instead of passing on the new client and losing a valuable new client, Alpha Business pursues an agreement with an invoice factoring company.
Alpha Business submits the invoice from the job they completed to the lender. In return, the lender issues and advance, usually around 90% of the unpaid amount. This advance gives Alpha Business the money to cover payroll, purchase new materials, and accept the new job.
The customer submits payment for the invoice to the lender. Once the lender receives the full amount, they submit a rebate to Alpha Business. The rebate, or reserve amount, is the remaining 10% of the invoice amount minus the lender’s fees.
How Much Does Accounts Receivable Factoring Cost?
Lenders don’t offer advances to companies out of the goodness of their hearts. They collect fees for the service. In most cases, AR factoring fees range from 0.75-3.50%. However, exact rates depending on the following factors:
- The higher the risk of an industry, the higher the rate a lender charges the borrower.
- How much product is on the invoice? Lenders evaluate the volume of the invoice.
- What is your customer’s credit history? Do they have a solid history of timely payments?
- The age of the invoice matters, and lenders will consider how much time is left before the customer must pay. Most lenders want invoices due within 90 days.
- Is it recourse factoring or non-recourse factoring? Recourse factoring leads to lower rates, and we’ll explain why in a moment. Just know that non-recourse factoring costs a bit more.
Generally, the lower the risk involved, the lower the related fees. It’s important to understand what a lender considers, so you know what to expect before entering an agreement.
Keep in mind, there could be other fees involved, so it’s necessary to read over the agreement before signing. You don’t want to be surprised by a lower-than-expected rebate due to additional fees.
Recourse vs. Non-Recourse AR Factoring
One of the things lenders consider when determining invoice factoring rates is whether the transfer is with or without recourse. You must understand the difference between the two types before entering an agreement with a lender.
Most accounts receivable factoring falls under the recourse category because it is less risky for the lender. If a customer fails to pay an invoice in the set time frame, the lender can ask for recourse, or repayment of the amount they lent you.
When choosing the recourse factoring option, it’s in your best interest to only choose invoices from reliable customers. Borrowing against invoices with unstable clients sets you up for trouble down the line.
Non-recourse factoring is less risky for the borrower because they don’t have to return the advance if a customer fails to pay. However, there is more involved with non-recourse factoring because it doesn’t cover every failure to pay.
Most non-recourse factoring agreements include lists of clients they accept and circumstances they don’t cover, including breach of the agreement and disputed invoices. Further, the non-recourse provisions tend to apply only in situations where a customer cannot pay the invoice, like if they file for bankruptcy. Make sure that you’re also prepared to pay higher rates for taking on a non-recourse factoring agreement.
Benefits of Financing with Accounts Receivable Factoring Lenders
Invoice factoring can help newer businesses or companies with credit challenges establish a solid credit history. By paying your factoring fees on time, you demonstrate financial responsibility and improve your business’s credibility with lenders.
Access Fast and Easy Financing
Unlike traditional loans, accounts receivable factoring provides quick access to cash with minimal paperwork. This allows businesses to cover expenses or take on new projects without lengthy approval processes.
Maintain Debt-Free Cash Flow
Since factoring is an advance on money you’re already owed, it does not appear as a loan or debt on your balance sheet. No collateral is required, making it a flexible financing option for businesses that want to avoid additional liabilities.
Cover Cash Shortfalls
Factoring ensures you have the funds to handle emergencies, slow-paying customers, or seasonal fluctuations. This helps businesses meet payroll, purchase materials, and continue operations without disruption.
Access Financing When Traditional Options Fail
Startups or companies with poor credit may struggle to secure conventional loans or investor funding. Accounts receivable factoring allows these businesses to leverage guaranteed invoices and maintain growth potential.
Manage Growth
Businesses experiencing fast growth can use factoring to keep up with increased demand. By converting invoices into immediate cash, companies can accept more clients, scale efficiently, and capitalize on new revenue opportunities.
In-Summary: Accounts Receivable Factoring
Accounts receivable factoring has gained popularity for a good reason. Provided you can cover the small factoring fees and your customers can be relied upon to make the full payment to your lender, there’s not much risk involved.
If your company has several unpaid invoices and needs cash to sustain or grow, accounts receivable factoring could be just what you need. It’s a viable alternative financing option that provides fast cash, regardless of a company’s credit history.
Michael McCareins is the Content Marketing Associate at altLINE, where he is dedicated to creating and managing optimal content for readers. Following a brief career in media relations, Michael has discovered a passion for content marketing through developing unique, informative content to help audiences better understand ideas and topics such as invoice factoring and A/R financing.
