Invoice factoring: how it works, what it costs and when it makes sense.
Invoice factoring is selling your unpaid invoices to a factoring company at a discount. Instead of waiting 30, 60 or 90 days for your customer to pay, you get most of the invoice value within days, and the factoring company collects from your customer. It's not a loan: approval depends mainly on your customers' credit, not yours.
Daniel Chirino · Business Development Officer, 1st Commercial Credit
Updated: October 28, 2026
The three parties in every factoring deal
The seller: you
You deliver the product or the service and send an invoice to your customer.
The debtor: your customer
The company that has to pay the invoice. Its credit is what the factoring company looks at most.
The factor
The factoring company. It buys the invoice, pays you upfront and takes on collecting the payment from your customer.
How invoice factoring works, step by step
- Step 1
You deliver and invoice
You provide the service or deliver the product, and send the invoice to your customer.
- Step 2
You send the invoice to the factor
With its backup documentation, so it can be verified and funded.
- Step 3
You get the advance
The factor verifies the invoice and advances 80% to 90% of its value to your business bank account.
- Step 4
Your customer pays the factor
Directly. A notice of assignment tells your customer where to send the payment.
- Step 5
You get the rest
The remaining 10% to 20% of the invoice is released to you, minus the factoring fee.
What invoice factoring costs
1st Commercial Credit publishes rates from 0.69% to 1.59%, depending on your volume, how fast your customers pay and their credit. It also says its average client pays a discount fee of about 2.25%, depending on how many days the invoices take to be paid. The longer your customer takes, the more it costs.
There are no financial statements to hand in, no facility fees and no audit fees, and the credit analysis of new customers is free.
Questions to ask any factoring company before you sign
- Who will call me, and how fast?
- Is it recourse or non-recourse, and what exactly does non-recourse cover? Often it only covers a customer that goes bankrupt.
- Is there a reserve or a monthly minimum?
- Can I have every cost in writing?
All of them, with how 1st Commercial Credit answers: 11 questions to ask a factoring company.
An example from 1st Commercial Credit
| Invoice value | $500,000 |
| Advance (90%) | $450,000 |
| Fee (2% in this example) | $10,000 |
| Rest, when your customer pays | $40,000 |
| Total you receive | $490,000 |
The real fee depends on your case and is confirmed in writing before you sign.
Factoring vs a bank loan
Invoice factoring
- You sell invoices. It doesn't add debt to your balance sheet.
- Approval depends mainly on your customers' credit.
- Only your receivables are involved, not your equipment, inventory or real estate.
- It grows with your sales, without renegotiating.
- At 1st Commercial Credit, setup takes 3 to 5 working days.
Bank loan
- A lump sum you repay with interest. It adds debt.
- It needs a strong credit history and collateral.
- Usually all your business assets are pledged.
- A fixed limit you have to renegotiate to grow.
- More paperwork, and weeks to get a decision.
What you need to get started
To apply
- A 2-page online application and a signed proposal.
- Your accounts receivable aging report.
- Invoices with their backup documentation.
- Your last 3 months of bank statements.
- A photo ID and a voided check.
- Your master service or distribution agreements.
- The signed factoring agreement.
Once your account is set up
- You get an online account and an app to upload invoices and backup.
- Invoices are funded within 24 hours after verification.
- You can add new creditworthy customers as you grow, with free credit analysis.
- Purchase order financing is available after setup.
What changes by industry: documents checklist.
Source: 1st Commercial Credit's invoice factoring page, read October 28, 2026. Rates and terms are confirmed in writing before you sign.
When factoring is not the answer
- Your customers pay on delivery or within 15 days. There's no gap to cover.
- You sell to consumers. Factoring works on invoices to businesses or the government.
- The problem is margin, not timing. If a job loses money, getting paid faster only loses it faster.
- Your invoices aren't clean: the work isn't finished, or the customer disputes it.
The full list, and what to look at instead: when factoring is not the answer.
Factoring by industry
Every industry gets paid differently. These pages have the terms 1st Commercial Credit publishes for each one.
- Freight truckingTrucking
- Cable, telecom and fiberTelecom
- Staffing agenciesStaffing
- ManufacturersManufacturing
- Distributors and wholesalersWholesale and PACA
- Government contractorsGovernment receivables
- Oil and gasOilfield
- Security guard and cleaning companiesSecurity
- IT and service providersIT and services
- Businesses with a bank or SBA term loanSecond position
Questions business owners ask me about factoring
Is invoice factoring a loan?
No. You sell invoices you already earned. There's no lump sum to repay and no new debt on your balance sheet.
Will my customers know?
Usually, yes. A notice of assignment tells them to pay the factoring company. Some programs, like the one for distributors, have a non-notification option.
Can I factor with bad credit?
Often, yes. 1st Commercial Credit accepts low credit scores, because what weighs most is the credit of the companies that pay your invoices.
How fast can I get funded?
Setup takes 3 to 5 working days. After that, invoices are funded within 24 hours after verification.
Who are your customers?
It's the first thing I'll ask. Tell me who you invoice and on what terms, and I'll tell you whether factoring makes sense for you.
Also read: all industries · factoring behind an SBA loan · real deals