What is Invoice Factoring?

Invoice factoring is a financing method where an agency sells its outstanding invoices to a factoring company (also called a "factor") at a discount—typically 1–5% of the invoice value—in exchange for receiving the cash immediately rather than waiting 30, 60, or 90 days for the client to pay. The factoring company then collects payment directly from the client. For agencies, factoring addresses a common cash flow problem: you have delivered the work and sent the invoice, but the client pays on Net 30 or Net 60 terms, and you need to cover payroll and expenses now. Factoring bridges that gap without taking on debt. There are two types of factoring. Recourse factoring means if the client does not pay the invoice, the agency must buy it back from the factor—the agency retains the credit risk. Non-recourse factoring means the factor absorbs the loss if the client does not pay, but the discount rate is higher to compensate for this risk. Factoring is not right for every agency. The discount reduces your effective revenue, and the factor interacts with your clients during collections, which can affect the relationship. Alternatives include a business line of credit, requiring deposits or milestone payments, offering early payment discounts to clients, or using invoice financing (which is a loan secured by invoices rather than a sale of them). Most agencies use factoring as a temporary measure during growth phases when cash needs outpace collections.