The Pros and Cons of Working with a Factoring Company

Should I use a factoring company? Long before anyone signs on the dotted line, this is the question business leaders weigh heavily. The good news is that the advantages of factoring companies usually outweigh any drawbacks, but some skepticism and critique are healthy when you’re making any major financial decision for your business. In this guide, we’ll walk you through how factoring works and how it compares to other forms of funding, the pros and cons of factoring, and how to mitigate the challenges some businesses experience, so you can move forward with confidence.

How Factoring Works

The history of invoice factoring goes back thousands of years. It was initially leveraged by the Ancient Phoenicians to help manage trade across the Mediterranean coastline. Today, hundreds of thousands of small businesses across the United States use factoring to support their funding needs, per the latest Small Business Credit Survey.

Instead of taking out a loan, invoice factoring turns your outstanding receivables into usable cash sooner. You’re speeding up the receipt of money already earned, which can make cash flow steadier during long payment cycles or periods of growth.

The Factoring Process

Once your account is set up, the steps move quickly. You submit an invoice, the factor advances a percentage of it, and the remainder is released when your customer pays. Most businesses see the process unfold like this:

• Invoice Submission: You send the factor your invoice and any required documents.
• Customer Verification: The factor confirms the invoice is valid and the work is complete.
• Advance Payment: A portion of the invoice value is deposited into your account.
• Customer Payment: Your customer pays the factor directly.
• Remainder Released: The factor sends the remaining funds to you, minus the agreed fee.

Recourse vs. Non-Recourse Factoring

The two main types of factoring are recourse and non-recourse. When you decide which one to use, you’re ultimately choosing what happens next if a customer does not pay their invoice.

• Recourse Factoring: You replace the invoice or repay the advance if your customer does not pay. The cost is usually lower because the factor assumes less risk.
• Non-Recourse Factoring: The factor absorbs the loss if your customer does not pay for the covered reasons listed in your agreement. This option appeals to businesses working with customers who have inconsistent credit histories.

The Cost of Factoring Services

Your total invoice factoring costs are comprised of several elements:

• Factor Rate: A factor rate is different from an interest rate. Instead of having interest that compounds over time, you’ll pay a portion of the invoice’s value. It’s usually between one and five percent and accounts for most of the total cost of factoring.
• Additional Fees: Some factors include optional services or special conditions that may add to the total cost. For instance, if you opt for same-day payments with wire transfers, you’ll likely see an additional charge for this.

How Factoring Compares to Other Small Business Funding Options

There’s a wide range of funding options for small businesses, from traditional bank loans to credit cards. These products each serve a purpose, but they also come with limitations tied to credit requirements, payout timelines, or long-term debt. Factoring fits into this landscape as an alternative that moves with your sales and helps you access cash faster than many forms of short-term and long-term financing.

Factoring vs. Bank Loan

Bank loans can be effective when you qualify for favorable terms and have time to move through the underwriting process. The structure is familiar, and the cost can be low, though approval often requires strong financials and a long operating history.

Many businesses choose factoring when they need faster access to capital or when qualifying for a loan is difficult. Funding arrives quickly after invoices are submitted, and the approval process is typically more flexible.

Factoring vs. Lines of Credit

A business line of credit offers revolving access to funds and can help cover day-to-day needs as long as you maintain the required financial ratios. Limits are fixed, and lenders may adjust them during periods of uncertainty.

Factoring is often preferred when you want a source of working capital that scales with sales. As you generate more invoices, your available funding grows, which can support expansion without the constraints of a preset limit.

Factoring vs. Credit Cards

Credit cards are convenient for smaller expenses and short-term gaps, but they carry high interest rates and can lead to long-term balances if cash flow is tight, which unfortunately leads to financial issues for many small businesses. They work well for incidental spending when managed carefully, though they are less suited to larger operational needs.

Factoring is often chosen when the business needs a steadier flow of working capital. Instead of borrowing at a high rate, you are speeding up payment on revenue you have already earned.

Factoring vs. Merchant Cash Advance

A merchant cash advance (MCA) delivers funds quickly, but the cost can be high, and payments are pulled directly from daily or weekly sales. This structure can add pressure during slower periods and make cash flow harder to predict.

Factoring tends to be a better fit for businesses that want a clear cost structure and a funding model based on completed work. Payments are tied to customer invoices, which gives you more control over how cash moves through the business.

The Pros and Cons of Factoring

At this stage, you should have a firm grasp on how factoring works and compares to other forms of business funding. Let’s dig into the pros and cons of factoring.

Invoice Factoring Benefits and Pros of Working with a Factoring Company

You’ve probably picked up on a lot of the benefits of factoring and working with a top factoring company, but the advantages go much deeper than simply receiving fast funding when you need it.

You’re Accelerating Cash Flow, Not Taking on Debt

Most businesses operate on net-30 terms, though some give their customers 60 or 90 days to pay, depending on industry standards. Factoring can provide you with payment on the day you submit your invoice, eliminating these long payment windows. Because you’re accelerating payment on money you’ve already earned, no debt is added to your balance sheet.

Approval is Easier

Traditional funding often breaks down when younger businesses have limited credit history or owners have weaker personal credit. Factoring approval is driven by your customers’ credit strength, not yours, which is why it works well for businesses that banks turn away. Most businesses with B2B invoices can get approved.

Your Collections Are Taken Care of for You

One of the most overlooked benefits of factoring is collections services. More than two-thirds of small businesses spend an average of 14 hours per week on administrative tasks related to collecting invoices, according to Intuit surveys. With your factoring company handling this for you, you can put that time toward high-level strategy and growing your business.

Late Payments and Bad Debt Reduce

Nearly half of all B2B invoices are paid after the due date, according to Atradius. Your factoring company helps reduce late payments by performing credit checks and providing credit management guidance.

It’s also worth noting that around six percent of B2B invoices are written off as bad debt. While following tips and best practices for bad debt reduction can help, and applying guidance from your factoring company can reduce bad debts even further, the risk is never fully erased. If you’re in a high-risk bracket, non-recourse factoring can help close that gap.

Business Financial Health Improves

Consistent cash flow stabilizes nearly every financial metric that lenders and partners look at: on-time vendor payments, lower short-term borrowing, and predictable expense cycles. Businesses that factor routinely report that it’s easier to manage payroll, fuel costs, materials, and recurring obligations because their receivables turn into cash at a reliable pace.

Your Credit Score May Get a Boost

When you are no longer stretching payments or running up balances to cover slow receivables, your payment history naturally strengthens. Over time, that can translate into a better credit score, which helps when you eventually pursue lower-cost funding that becomes available as you grow.

You Can Accept Larger Orders and Contracts

Factoring removes the bottleneck created by long customer terms. Instead of passing on opportunities because the upfront labor or material cost is too high, you can take on larger contracts knowing you’ll receive cash shortly after invoicing. This is one of the most common reasons growing companies use factoring even if they qualify for other types of funding.

You’re Connecting with a Partner Who’s Invested in Your Growth

Factoring companies like Viva Capital offer industry-specific tools that support operations beyond funding, such as fuel cards and advances for transportation or quick-pay structures for construction. These perks exist because factors succeed when you do, so your growth and operational efficiency directly benefit the relationship.

You May Gain Access to Additional Forms of Funding

A factoring company that has been working with you for some time has deep visibility into your receivables and operational patterns. Because of this, it puts them in a unique position to underwrite solutions more flexibly than lenders that only look at credit scores or collateral.

For instance, at Viva, we also provide asset-based lending, equipment financing, and short-term financing. Our clients often turn to these solutions when they require more capital for growth than factoring alone can provide.

You Can Improve Relationships with Customers and Vendors

Reliable cash flow allows you to pay vendors sooner and negotiate better terms. At the same time, your customers benefit from consistent communication and cleaner billing, since a factor brings structure to the invoicing and payment process. Many clients experience fewer disputes simply because the workflow becomes more organized. They also appreciate being able to have longer payment terms, which isn’t always possible when factoring is not leveraged.

You Gain a Competitive Advantage

Stable cash flow lets you move faster, price more competitively, and respond to opportunities your competitors cannot act on because they are still waiting for payments. The benefit is subtle but powerful: agility becomes part of your operating model.

Invoice Factoring Risks and Cons of Working with a Factoring Company

As you can see, factoring offers a wealth of benefits, but it’s not right for every situation. Knowing the risks and potential drawbacks can help you better prepare for the road ahead.

Even a “Good” Factoring Company Might Not Be Right for You

Factoring companies often specialize by industry, and that specialization matters. For instance, a firm that excels in transportation may not understand the billing cycles, margin structure, or customer nuances of staffing, manufacturing, or oilfield services. The experience needs to match your business, not just general factoring best practices.

The Costs May Be Higher Than Other Forms of Funding

Factoring can cost more than low-interest loans. Many owners use factoring strategically during growth or long payment cycles, then move toward lower-cost options once their credit profile or financials qualify them for traditional funding. A good factor expects that your relationship may be seasonal, intermittent, or temporary.

There May Be Fees Beyond the Base Factoring Rate

The factor rate is only one part of the total cost. Services like same-day funding, wire transfers, or special processing can carry additional fees. The best way to avoid surprises is to request a complete fee schedule and understand exactly when each charge applies if you’re evaluating factoring companies or performing a factoring company comparison.

Cost May Vary Based on Your Customers

Your customers’ credit quality has a direct impact on your rate. Higher-risk customers create higher costs because the factor assumes more exposure. Businesses that serve large, established buyers often see more competitive pricing than those working with newer or inconsistent payers.

All Your Customers May Not Qualify

Factoring works only when the customer paying the invoice meets the factor’s credit standards. If a buyer has a history of late payments, disputes, or financial instability, their invoices may not be eligible. This sometimes limits which accounts you can factor.

Factors Engage with Your Customers

The factor will interact with your customers to verify invoices and receive payments, but the communication is administrative rather than collections-driven. Still, it is important to choose a partner that communicates professionally, mirrors your brand tone, and maintains positive relationships on your behalf.

You May Still Be Responsible for the Balance if Your Customer Does Not Pay

As mentioned earlier, there’s always some risk of customer non-payment. In traditional recourse factoring agreements, your business is responsible for ensuring the factoring company doesn’t take a loss if this occurs. If you have a non-recourse agreement, the factoring company absorbs the loss in specific cases, such as if the customer files for bankruptcy. However, it generally does not absorb the loss if the customer disputes the invoice.

You can help avoid these situations by following best practices with invoicing and credit management. But you should also know that if you do wind up with an unpaid balance, your factoring company will typically work with you to resolve it. For instance, most allow you to submit a new invoice in place of an unpaid invoice, while others leverage your reserves. Your factoring agreement should cover the specifics and options, but if anything seems unclear, include it in the questions you ask your factoring company before signing up.

Factoring is a Tailored Cash Flow Solution

Factoring solves cash flow delays caused by slow-paying customers. It does not solve deeper issues such as weak profitability, declining sales, or an unsustainable business model. The fit is strongest when your business has steady demand but needs faster access to the cash it is already earning.

Get the Answers You Need to Make an Informed Decision

Invoice factoring is the ideal funding solution for many small businesses, but making it work requires not only understanding the pros and cons of factoring but also finding a partner that understands how you work and offers tailored services. To learn more about the process or explore the fit, request a free rate quote.