What is invoice factoring?

You sell qualifying business invoices to a factoring company at a discount. The factor advances 70-90% of the invoice value upfront, then collects from your customer when the invoice is due. After collection, the factor remits the remaining 10-30% minus a factor fee (typically 1-5% per 30-day period the invoice is outstanding). It is a sale, not a loan.

Is factoring more expensive than a working capital loan?

Often yes per dollar borrowed, especially for invoices that take 60-90 days to collect. A 3% factor fee per 30 days on a 60-day invoice is 6% on that capital for 60 days — roughly 36% APR. A working capital loan at 18% is cheaper. But factoring scales automatically with revenue and approves on customer credit, not yours.

Will my customers know I'm factoring?

In notification (most common) factoring, yes — the factor sends customers a notice of assignment and collects directly. In non-notification factoring, the customer pays you and you forward to the factor. Notification is cheaper because the factor controls collection; non-notification preserves your customer relationship but costs more.

What is the difference between recourse and non-recourse factoring?

Recourse: if your customer doesn't pay, you owe the factor back the advance. Non-recourse: the factor takes the bad-debt risk on the customer (within defined credit limits). Non-recourse costs more (additional 0.5-1% per period) and doesn't cover invoice disputes — only credit defaults.

Who qualifies for factoring vs WCL?

Factoring qualifies on customer credit and invoice quality — your own credit and time in business matter less. A 580-FICO startup with strong B2B customers can factor when they cannot get a WCL. Working capital loans qualify on your business's revenue, credit, and time in business.

Invoice Factoring vs Working Capital Loan | Cost & Trade-offs

Quick answer

Invoice factoring: sell qualifying invoices at 1-5% per 30-day period the invoice is outstanding (≈12-60% APR). Factor advances 70-90% upfront, collects from your customer, remits the rest minus the fee. Qualifies on customer credit. Working capital loan: borrow at 9-30% APR, fixed monthly P&I, qualifies on your credit and revenue. Factoring scales with AR automatically and approves at lower personal credit but is more expensive and customer-visible. WCL is cheaper, invisible, but requires your own credit profile to qualify.

Compare working capital options →

The factoring-vs-WCL question matters most for B2B service businesses, staffing companies, trucking, and manufacturers with net-30/60/90 invoice terms. Factoring is older and more specialized; working capital loans are more familiar but have stricter qualification. This guide compares them on cost, qualification, and the often-overlooked customer-relationship dimension. For broader context see working capital loans and revenue-based financing.

How Each Works

Invoice factoring

You sell a qualifying invoice (typically B2B, net-30/60/90, customer with established credit) to a factor. The factor:

Verifies the invoice with your customer
Advances 70-90% of face value to you immediately
Collects from your customer when the invoice is due
Remits the remaining 10-30% to you, minus the factor fee

Factor fees run 1-5% per 30-day period the invoice is outstanding. A $10K invoice paid in 45 days at a 3%/30 fee = ~$450 fee. The fee is structured per period; faster collection means lower total fee.

Working capital loan

Standard short-term business loan: $25-500K, 9-30% APR, 6-24 month term, fixed monthly P&I. Underwriting based on your business credit, revenue, time in business, and bank statements. Disburses lump sum; you make monthly payments regardless of cash collection from customers.

Side-by-Side

Dimension	Factoring	Working Capital Loan
Legal structure	Sale of receivables	Loan
Cost	1-5% per 30 days (≈12-60% APR)	9-30% APR
Qualifies on	Customer credit	Your credit and revenue
Min FICO	No minimum (strong customers OK)	660+
Speed	First funding 1-2 weeks; subsequent 1-2 days	3-10 business days
Scaling	Automatic with AR growth	Fixed at origination
Customer impact	Customer often notified, factor collects	Invisible to customer
Bad-debt risk	Recourse: yours; Non-recourse: factor's	Yours (you owe regardless)

When Factoring Fits

B2B revenue with long net terms — trucking (60-day shipper terms), staffing (60-day client terms), manufacturers, government contractors.
Strong customer credit but weak own credit — staffing company billing Fortune 500 customers with sub-650 owner FICO.
Rapid growth needing scaling capital — AR doubling means factoring capacity doubles; WCL is fixed at the dollar amount you sized for.
Specialty industries — trucking factoring, medical AR factoring, government-contractor factoring all have specialty factors with industry expertise.
Acceptable customer transparency — if customers seeing the factor in the payment chain is fine, factoring is the right tool.

When a Working Capital Loan Fits

Predictable monthly debt service — you want a fixed payment amount that doesn't depend on AR collection.
Customer relationships are sensitive — you don't want the factor visible to customers.
Strong own credit — 700+ FICO, 2+ years in business, $25K+ monthly revenue.
Use of funds beyond AR financing — equipment maintenance, inventory, marketing, payroll bridge.
Lower per-dollar cost — on the same dollars over the same period, WCL usually costs less.

Cost Example: Staffing Company, $100K AR Cycle

Staffing company with $100K average outstanding AR, average 60-day collection.

Factoring at 3%/30 days, 60-day average outstanding: 6% per cycle = ~36% effective APR. Annual cost on $100K outstanding: ~$36K.
WCL at 18% APR for $100K outstanding: ~$18K annual interest. WCL is half the cost.
But: WCL is fixed at $100K. If AR grows to $200K, WCL doesn't. Factoring automatically scales to the new $200K.

The right answer depends on growth trajectory. Stable AR: WCL wins. Rapidly scaling AR: factoring may be worth the cost premium for the auto-scaling capacity.

Next Step

If your B2B AR is the cash-flow bottleneck and you want to compare both products on the same set of invoices, compare working capital options — one application reaches both factoring companies and WCL lenders.