What Is a Factoring Company?

Last Updated January 30, 2026

Cash flow can make or break a business, especially when customers take weeks, or even months, to pay their invoices. Factoring companies help businesses that struggle with cash flow to access working capital, even when their customers have yet to pay.

In this article, we will cover what a factoring company is, how invoice factoring works, what makes a factoring company different from other types of lenders, and which businesses could benefit from factoring.

What Is a Factoring Company and What Does It Do?

A factoring company (often called a “factor”) specializes in invoice factoring, a type of alternative lending in which a business sells its invoices at a discount in exchange for a cash advance. Once the business’s invoices have been purchased, the factoring company sends money directly to the client and then collects payments from their customers on their behalf. This process allows the business to access working capital much more quickly, bridging the cash flow gap between services rendered and customer payment.

Factoring companies are not one-size-fits-all. In fact, many focus on specific industries like trucking, construction, or staffing. Some banks offer factoring services, but the majority of factoring companies are independent providers. Generally, firms that would benefit from a factoring service are firms that depend on credit sales and have slow-paying clients.

A More Detailed Look at Factoring

Invoice factoring is used to improve cash flow for businesses that need to access working capital more quickly than their customers submit payment. It is a useful type of alternative financing for B2B companies that cannot obtain traditional financing options, such as a loan or line of credit.

The factoring process is as follows:

1. First, you sign an agreement with a factoring company, thus allowing the company to help manage and oversee the receivables that you plan to factor. Moving forward, your customers are to submit payment to the factor rather than your business.
2. Once you invoice your customer, you’ll submit that invoice to the factoring company for processing.
3. The factoring company advances the majority of the invoice value (typically 80% – 90%) to your business to be used to cover expenses, such as payroll, equipment maintenance, rent, etc.
4. Once your customer submits payment to the factoring company, the remaining value of the factored invoice is released to you, minus the factoring fee.

Why Do Businesses Use a Factoring Company’s Services?

Businesses use factoring to accelerate payment schedules when clients are slow to pay. Instead of waiting 30, 60, or even 90 days, business owners can receive a large portion of the owed amount within 24 hours. This helps alleviate cash flow issues caused by late invoice payments.

Additionally, invoice factoring can be easier to qualify for than traditional financing, like bank lines of credit or business loans. With a less strict application process, new companies and those with less-than-ideal credit can qualify for factoring without having to provide collateral or an equity injection.

Other benefits of factoring include:

• Provides quick access to working capital
• Is scalable and grows with your business
• Is accessible to startups and those with poor credit
• Does not require collateral or an equity injection, since your customers’ invoices act as the collateral
• Provides complimentary customer credit checks
• Is not a form of debt
• Offers invoice collection support
• Does not require you to give up business equity

How Does a Factoring Company Make Money?

A factoring company makes money through factoring fees. When a business factors its invoices, the factor advances up to 90% of the invoice value to the business. When the factor collects the full payment from the end customer, they return the remaining 10% to the business, minus a factoring fee. That fee is typically between 1% and 5%, depending on multiple factors, like the average age of the business’s accounts receivable and the creditworthiness of its debtors.

How Do Factoring Companies Calculate Their Fees?

Factoring fees generally range from 1% – 5% and are calculated based on a number of elements:

The Amount of Money Being Factored

Like most businesses, economies of scale are at play for factoring companies as well. Many of the costs associated with establishing and maintaining a factoring relationship are fixed in nature, so the more a factoring client utilizes its line, the lower their rates will be.

The Length of Your Invoice Terms

Factoring companies charge higher rates for invoices with longer payment terms (i.e. 60 – 90 days). This is because they’re advancing cash to your business for a longer period of time, and that time has value to the factor.

The Credit Quality of Your Customer(s)

Your customers are the ones who will pay the invoices you’re factoring. Therefore, the factoring company will want to ensure that your customers are good for the money. Better credit will result in lower factoring fees, and vice versa.

What Makes a Factoring Company Different from a Traditional Lender?

Factoring companies are different from traditional lenders because they do not provide loans – instead, they purchase assets (i.e., your invoices). Therefore, you do not incur a debt, and your agreement and use of the line does not impact your credit score (aside from the impact from the initial credit check.)

Factoring companies are also a lot more hands-on than most lenders. While most lenders are simply a source for funds, a factoring company like altLINE also assumes responsibility for all AR-related responsibilities.

According to altLINE VP of Operations Kelley Burnett, this includes, “calling customers, verifying invoices, and vetting potential new customers with background checks.”

A business owner might inherently be skeptical of working with a third-party that’s so hands-on, but it’s important to remember that the factoring company has funds tied up with debtors. Therefore, a company like altLINE is going to do everything they can to ensure back-office responsibilities and the factoring process as a whole are as seamless and efficient as possible.

“We’re married to the successes and problems of our customers,” Burnett said. “If we don’t fund your business as timely as possible, it hurts both of us. That’s something we tell our clients if they’re ever wary of something we’re doing. If something bad happens to them, something bad is likely happening to us.”

Many businesses owners view altLINE as an extension of their company.

“We end up giving clients a lot of advice, not only related to factoring,” Burnett added. “We end up becoming de facto consultants for our clients, just because we’ve seen so much over the years. A lot of them haven’t run into certain scenarios that we’ve already seen, so they’ll come to us for advice.”

What Is a Factoring Agent?

A factoring agent is an intermediary agent that provides cash or financing to companies by purchasing the account receivable. In exchange for your account receivable and factoring fee, the agent provides a cash advance, typically worth up to 90% of the invoice’s value, within 1 or 2 days.

What Industries Do Factoring Companies Serve?

Companies typically specialize in a few industries, but altLINE works with the following:

• Staffing
• Transportation and Trucking
• Distribution and Wholesale
• Manufacturing
• Consulting
• Food and Beverage
• Government Contracting
• Professional Services
• Textile and Apparel
• Oil and Gas
• Janitorial Services
• And more…

What Types of Businesses Use Factoring Companies?

All sorts of businesses use invoice factoring companies, but all of them use a business-to-business (B2B) structure. Additionally, while factoring is not exclusive to a particular industry, there are some that use it more often than others, like trucking and staffing. Below are some of the most common types of companies that use factoring. If your company is not one of the types mentioned below, that does not mean that it is not a fit for factoring. You can call one of our representatives to see if your business qualifies at +1 205-607-0811.

Trucking Companies

Trucking companies in particular are known for using factoring, so much so that there’s an industry-specific term for it: freight factoring.

Factoring companies for carriers are especially important because they often need reliable cash flow to support business operations, such as to purchase fuel or pay drivers. However, brokers and shippers in the freight industry often take weeks to pay, which can jeopardize the carrier’s day-to-day operations.

In addition to accessing cash much more quickly, there are many other benefits of freight factoring as well, such support with back office paperwork and free broker credit checks.

Staffing Companies

Staffing agencies also often use factoring companies, and factoring in the staffing industry is frequently called payroll funding, as that is the most common expense the advanced cash is used for.

Staffing firms, especially new agencies, often face the challenge of making payroll before an invoice has been paid. Net 30 payment terms are commonly used, but payroll is typically expected on a weekly or bi-weekly basis, creating a cash flow gap that can be difficult to manage. By working with a factoring company, staffing agencies can access the capital for payroll the same day that the invoice is sent, reducing stress and boosting employee morale with on-time pay every time.

The Final Step: How to Choose Your Factoring Company

No two factoring companies do things exactly the same – they specialize in different industries, offer different terms, and use different language. These differences make comparing factoring companies difficult.

When you begin your research to find the best factoring company, ask these five questions first:

1. How long have they been in business?
2. What are their terms, fees, and funding limits?
3. How frequently and quickly will your invoices be funded and payments applied?
4. How will they interact with your customers?
5. Where are their funds coming from (are they a bank or will they use a middleman?)

Additionally, be sure to look at third-party reviews to get an understanding of others’ experiences with the factoring company. Trustpilot and Google reviews are great options when researching your potential factoring partner.

Why Businesses Partner with altLINE

altLINE is an extension of the Southern Bank Company, which has been serving customers since 1936. As a state and federally regulated bank, we build trust with customers through transparency and financial security. We take pride in our customer service and provide each client with a dedicated account manager who can be contacted by phone, email, or even text message. You can see what our clients have to say about their experiences through our customer testimonials.

If you have any questions about the factoring process or whether you might be the right fit, feel free to contact us. We’d be happy to guide you in your decision-making process. You can call one of our representatives at +1 (205) 607-0811 or request a free quote.

What Is a Factoring Company FAQs

What factoring companies should I avoid?

Above all, avoid any factoring company that you don’t feel you can trust. Are they slipping additional fees into your factoring contract (like unused line fees, renewal fees, and monthly minimums)? Are you concerned that they won’t represent your business appropriately when collecting outstanding invoices from your customers? Do they have consistently negative online reviews? These are the kinds of companies you should avoid when selling your receivables.

Are factoring companies predatory?

No, there are plenty of good providers out there. Invoice factoring can get a bad reputation from some disenchanted customers, largely because of outlying dishonest factoring companies employing shady tactics. However, factoring has been around for centuries, and when done right with transparency, reliability and trust, it’s a great option for many businesses.

What types of invoice factoring services are there?

Recourse and non-recourse factoring are two of the most discussed types of factoring. When you factor with recourse, you are agreeing to take responsibility for a factored invoice if the factoring company is unable to collect payment from the debtor. On the flipside, non-recourse factoring means that the factoring company takes responsibility for the non-collectible invoice. While non-recourse may sound appealing, it’s important to note that it is more expensive because of the increased liability that the factoring company takes on.

Does it matter if the factoring company is near me?

Not particularly. When you factor your invoices, everything can be done digitally or via mail. While you may find that a local factoring company is more appealing or trustworthy, most factors provide services nationally (and some internationally.) The most important thing is to find a factoring provider that you trust.

What percentage do factoring companies take?

Most factoring companies take 1% – 5% of your invoice value based on your total factoring volume, client creditworthiness, business stability, and other considerations.

Jim Pendergast

Jim is the General Manager of altLINE by The Southern Bank. altLINE partners with lenders nationwide to provide invoice factoring and accounts receivable financing to their small and medium-sized business customers. altLINE is a direct bank lender and a division of The Southern Bank Company, a community bank originally founded in 1936.