Is Factoring a Loan? How It Works

Last Updated January 28, 2026

Many small business owners wonder if accounts receivable factoring, also called invoice factoring, counts as a loan. The short answer is no. Factoring is a financing method that provides cash based on unpaid invoices, not borrowed money that must be repaid with interest.

This article explains how factoring works, why it is different from a loan, and the benefits for businesses of all sizes.

How Does Factoring Work?

The factoring process is relatively straightforward:

1. Sign a Factoring Agreement

After finding a factoring provider, they will assume responsibility for collecting payment on your invoices. Your customers pay the factoring company directly.

2. Submit Invoices to the Factoring Company

Forward your unpaid invoices to the factoring company to start the funding process.

3. Receive an Immediate Cash Advance

The factoring company provides an upfront payment, typically up to 90% of the invoice value and within 24 hours of submitting the invoice.

4. Factor Tracks Payments

The company manages collections while you focus on running your business.

5. Receive the Remaining Balance

Once your customer pays the invoice, the factoring company releases the remaining funds minus their fee.

Because the cash comes from your receivables rather than a loan, you are not creating debt.

Why Factoring Is Not a Loan

Invoice factoring is an advance on money your business is already owed. When you factor an invoice, a factoring company provides immediate cash for unpaid invoices. Unlike a loan, you do not borrow money from the lender, so there is no debt on your balance sheet.

With traditional loans, you must qualify based on credit history, provide collateral, and repay the full amount with interest. Invoice factoring, in contrast, is based on the value of your invoices and your customers’ payment reliability.

To summarize, factoring is not a loan because:

• It is an advance on outstanding invoices, not borrowed money.
• There is no interest, collateral, or repayment schedule.
• Fees are based on the invoice value, not on a loan principal or interest rate.
• It does not appear as debt on your financial statements, making it easier to maintain financial flexibility.

Accessing Capital With Factoring vs. a Bank Loan

Here’s a more in-depth breakdown of what it looks like to access capital via invoice factoring in comparison with a traditional bank loan:

Accessing Capital Through a Bank Loan

When you take a bank loan, you are borrowing money that must be repaid with interest. Banks require extensive credit checks and documentation, and your business must carry the loan as debt on its balance sheet. While loans can be inexpensive with low rates for businesses with strong credit, poor credit or limited history may result in higher rates or loan denial. Interest payments over 24 to 36 months can reduce cash flow and make additional borrowing difficult.

Accessing Capital Through Accounts Receivable Factoring

Invoice factoring uses your own money already owed by customers. A factoring company reviews the invoice and, if the customer is financially sound, agrees to provide the majority of the invoice value immediately. The factor collects payment and later transfers the remaining balance minus a small fee.

Factoring is fast, often providing cash within two to three days for new accounts or a few hours for established accounts. Approval depends on customer reliability rather than your business credit. While fees may be higher than loan interest, you can submit invoices only when needed, putting cash to work immediately to offset costs.

Benefits of Factoring

In addition to not being a loan, meaning no debt is incurred, accounts receivable factoring offers several other benefits:

• Fast access to cash to cover payroll, purchase materials, or handle emergencies.
• Helps businesses grow by allowing acceptance of new clients without waiting for payments.
• Builds business credit when fees are paid on time.
• For businesses struggling with cash flow or credit history, invoice factoring can be a better alternative than loans.

In-Summary: Factoring Is Not a Loan

Accounts receivable factoring is not a loan. Rather, it is an alternative financing tool that converts unpaid invoices into immediate cash, providing liquidity without creating debt. Factoring is ideal for businesses facing cash flow gaps, slow-paying clients, or rapid growth opportunities. Compared to bank loans, factoring offers speed, flexibility, and accessibility, making it a practical short-term financing solution for businesses of all sizes.

How Factoring With altLINE Can Help Your Business

For businesses with strong, predictable cash flow, low-interest bank loans may be the best option for long-term growth. However, businesses experiencing temporary cash flow shortfalls or with limited credit history benefit more from accounts receivable factoring. The right factoring company can provide fast cash, help manage customer relationships, and avoid hidden fees.

If you’re interested in factoring or want to find out if your business might be a fit, one of our representatives would be happy to answer any of your questions at +1 (205) 607-0811. Or, you could fill out our free factoring quote form.

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.