How to Start Invoice Factoring: A Step-by-Step Guide

Wondering how to start invoice factoring? The process is simple. We’ll walk you through everything you need to know in this step-by-step guide.

What to Know Before Factoring Invoices

Before we break down how to start factoring, let’s go over some background information on factoring, so it’s easier to see if it’s the right choice for your needs and how it compares to other solutions.

Invoice Factoring Explained

Invoice factoring is sometimes called “accounts receivable factoring,” “AR factoring,” or simply “factoring.” It’s an alternative business funding solution that involves selling your unpaid business-to-business (B2B) invoices at a slight discount to a third party called a “factoring company” or “factor” in exchange for immediate working capital.

Invoice Factoring vs. Invoice Financing

The terms “invoice factoring” and “invoice financing” are often treated as one and the same, but they’re distinct types of business funding that work differently.

While both fall under the umbrella of invoice funding and provide working capital based on the value of your invoices, factoring does not add debt to your balance sheet and requires no repayment. On the other hand, invoice financing is a form of asset-based lending. It’s a loan that uses your invoices as collateral, which means it creates debt, plus comes with a repayment schedule and interest.

Invoice Factoring vs. Traditional Bank Loans

Factoring is an alternative to traditional financing options like bank loans and is different in a number of ways.

Accessibility: Just 37 percent of small businesses that apply for business loans receive full funding, according to the latest Small Business Credit Survey. This is because it has rigid requirements tied to things like your credit score and time in business. However, approval for factoring depends on your customers’ creditworthiness. Even new or credit-challenged companies can be approved, which makes it much more accessible.
Speed: Whereas it may take months for a traditional loan application to be processed and paid out, factoring approval can be completed within a few days, and you can receive your first advance on the same day you submit your invoice.
Debt: With loans, you’re borrowing money that has to be paid back. With factoring, you’re selling your invoice, so there’s no debt involved.

How Invoice Factoring Works

The invoice factoring process is simple, and typically follows the path outlined below.

Approval: Before you can start factoring, the factoring company will need to approve your business and any customers of yours that have invoices you’d like to factor. At Viva Capital, we can get you approved in as little as eight hours, though a more standard industry timeline is a few days to a week.
Invoice Submission: Once approved, you can begin submitting invoices to your factoring company. Each invoice goes through a verification or validation process to ensure it’s unlikely to be disputed by your customer. If an issue is identified, the invoice comes back to you so you can resolve it directly with your customer. Validation typically occurs on the day you submit your invoice and happens quickly, so it doesn’t delay the timeline.
Receive Advance: Once the invoice is validated, you receive your factoring advance. This is typically 80 to 95 percent of the invoice value. At Viva, we offer up to 100 percent, minus the factoring fee. In a typical factoring agreement, the advance is sent via an automated clearinghouse (ACH) payment directly to your account, and can take 24 to 48 hours to post. However, at Viva, we also offer same-day payments.
Factoring Company Collects: Your factoring company will collect payments directly from your customers, freeing you from chasing payments. Your customers will continue to pay according to the terms you’ve set with them, usually within 30 to 90 days.
Release of Reserve: The factoring reserve is the portion of the invoice that is held back when you receive your advance. You receive this after your customer pays the invoice, minus any fees. Note that a typical factoring rate can be anywhere from one to five percent of the invoice’s value, although Viva has rates as low as 0.25 percent. Your rate will be based on things like your industry, level of risk, advance rate, invoicing volume, and other factors.

Who Factoring Works Best For

Invoice factoring works best when you’re experiencing cash flow shortfalls or bottlenecks from slow-paying customers because its primary function is to accelerate payment on your receivables. Because of this, many businesses leverage it when they’re experiencing rapid growth, struggling with seasonality, require a cash injection to cope with an emergency or seize an opportunity, or require capital for other reasons but don’t want to take on debt.

Although virtually any B2B business can benefit from factoring, certain industries tend to leverage factoring more because they have longer payment cycles.

Transportation: Fuel costs, maintenance, and repairs can prevent transportation companies from accepting an extra load or route. With transportation factoring, they can get upfront cash for the most recent run and get on the road faster. The service is often paired with fuel cards and fuel advances that make it easier to manage the disbursal of funds across a fleet and offer discounts on fuel and more.
Oilfield Services: Many of the larger energy companies are moving to net 90 payments, which makes it harder for the small businesses that support them to stay liquid, even if the contracts are lucrative. With oilfield factoring, companies that specialize in things like hauling, drilling, and equipment can accept these contracts with confidence.
Manufacturing: The upfront costs when manufacturing companies take on an order can be staggering, and often fluctuate greatly based on economic factors. With manufacturing factoring, these businesses can take on new customers or accept larger orders and know they’ll have the cash for upfront costs.
Healthcare: Healthcare providers can wait a month or more for large payors to send checks. The delays trickle downstream to the businesses that support them. Providers of healthcare factoring often support both these markets.
Staffing: Recruitment and onboarding can weigh staffing firms down with upfront costs. On top of this, they often pay the staff on a weekly basis, while their customers pay on net 30 or net 60 terms. This timing mismatch is solved through staffing factoring.
Service Providers: Janitorial, engineering, consulting, and other service-based businesses often experience high upfront costs for labor and face long waits for payments. By leveraging specialized factoring for service providers, they can align cash inflows with outflows.
Construction: Tradesmen and other subcontractors in the construction industry have a portion of their pay withheld until the end of the project. Known as retainage, this eats into funds available for purchasing materials and covering labor. It can be further complicated by milestone payments and slow approval of work. Contracts are also set up in a way that limits subcontractor funding options. Because of this, professionals use a special subset of factoring called “Construction Quick Pay,” which provides them with the necessary funds but is set up by the general contractor.

How to Start Invoice Factoring: A Step-By-Step Factoring Guide

Now that we’ve covered the background, let’s explore the steps involved when you start invoice factoring.

Step 1: Determine if Factoring is a Good Fit for Your Business

Although we went over who factoring works best for earlier, it can help a wide variety of businesses in many different situations. Make sure all of the points below apply to you before moving forward.

Current B2B Invoices: Invoice factoring only provides advances on current B2B invoices. Factoring companies generally prefer invoices generated within the past 30 days and often will not accept them if they’re older than 90 days. If yours are older, you’ll probably want to work with a debt collection company instead.
No Other Claims on Your Invoices: Sometimes, lenders or the IRS will file documentation stating they’re entitled to specific assets, such as invoices, in the event that you don’t pay an outstanding loan or balance. If another entity has taken first position on your receivables, they won’t qualify for factoring. However, sometimes they’re willing to shift to second position if they think it will help ensure they’ll be paid in full, so it’s not always a deal-breaker.
Generating Consistent Revenue: Although factoring companies work with startups and don’t require that you’ve been in business for two years like most lenders do, you’ll need to prove that you’re generating some revenue through invoicing.
Customers in Good Standing: The payment history of your customers is the largest determining factor in approval. If your customers are not creditworthy or haven’t been paying you on time, their invoices probably will not qualify for factoring.
Facing Cash Flow Challenges: Factoring addresses cash flow shortfalls and bottlenecks. It won’t help if your business isn’t profitable. And, although it can sometimes be used for large purchases such as equipment or a major expansion if your invoice volume is high enough, it’s generally not the most cost-effective solution in those cases. If you can qualify for an equipment loan or short-term financing, they’re probably a better fit.

Step 2: Review the Invoices You Want to Factor

Once you’ve decided that factoring is the right solution for your business funding needs, the next step is to review any invoices you wish to factor. Note that some factoring companies require whole-ledger factoring, meaning you factor all your invoices, and others have minimum volume requirements you must meet, or they may require that you factor all invoices from a specific customer. However, when you work with a top factoring company like Viva, these requirements don’t apply, and you can factor selectively as the need arises.

As you review your invoices, consider the following:

Invoice Age: Again, factoring only works for recent invoices, so you’ll want to remove any that are old from your list of potential factoring candidates.
Completed Work: Confirm that the work that the invoice is tied to is complete or that the goods were delivered.
Disputes: Ensure any invoices you wish to factor are free from disputes and are unlikely to be disputed by the customer. If any might be disputed, try to resolve those issues now.
Customer Standing: Your factoring company will likely run a credit check to confirm the creditworthiness of your customer. While it’s not necessary for you to do so as well, preemptively running a check can let you know if they’re likely to qualify and can provide you with insights to use when extending credit through invoicing. If you don’t check credit, at least confirm that the customer has a strong history of timely payments with you.
Missing Documentation: Ensure you have a copy of your contract with each customer and any documents that support the validity of the invoice, such as a signed bill of lading, field ticket, or purchase order.

Step 3: Gather the Business and Customer Documents a Factor Will Request

Before a factoring company can approve your account or purchase your invoices, it needs to verify that your business is legitimate, your invoices are valid, and your customers are likely to pay. Getting a few key documents together now can help you fly through the approval process when you’re ready to move forward.

Required Documents for Factoring

Most factoring companies will ask for a core set of business and invoice-related documents during the application and review process. These are outlined below.

Business Formation Documents: These include your articles of incorporation, partnership documents, or other records that show the business is properly formed.
Business Identification Details: Have your EIN, business license, and contact information ready.
Accounts Receivable Aging Report: Your aging report is a summary showing which customers owe money, how much they owe, and how long invoices have been outstanding. If you use accounting or invoicing software, you can usually get this report directly from the program.
Sample Invoices: Have copies of invoices you want to factor ready.
Customer List: Prepare a list of names of customers, payment terms, and contact information.
Proof Goods or Services Were Delivered: Depending on your industry, try to include things like signed delivery receipts, bills of lading, timesheets, work orders, or purchase orders.
Business Bank Account Information: The factoring company will need this for funding setup and payment processing.
Outstanding Financing Information: Details about existing loans, liens, or other arrangements involving receivables.

Additional Items That May Be on Your Factoring Company Checklist

In addition to the standard documents, a factoring company may ask for more information based on your industry, your customers, or the structure of your receivables. These extra items are often part of due diligence and help the factor assess risk before extending an offer.

Recent Bank Statements: These help the factor understand cash flow activity and business operations.
Tax Returns or Financial Statements: Sometimes, these additional documents are requested to provide the factor with a broader picture of your company’s condition.
Purchase Orders or Contracts: These are especially useful when the factor wants to match invoices to approved work or products.
Customer Payment History: You may need to provide information showing how reliably key accounts have paid in the past.
Information About Disputes, Offsets, or Chargebacks: If a factor sees these in historical documents, it can raise red flags because it suggests that the factoring company may have trouble collecting. Have documentation ready that explains why these things occurred and how they were resolved.
UCC or Lien-Related Documents: These are needed if a lender or the IRS already has a claim on your receivables.
Insurance Certificates or Industry-Specific Compliance Documents: You’re more likely to need to provide these if you’re in trucking, staffing, government contracting, or other specialized industries.
Schedule of Account Debtors: A more detailed breakdown of customer balances and concentrations may be needed in some situations. This can generally be pulled from your accounting software.
Voided Check or ACH Form: This is sometimes requested during account setup.

Step 4: Get Quotes and Compare Options

Once you have your documents ready, the next step is to request quotes from factoring companies and compare the offers you receive. Whenever possible, ask to review a monthly statement for a business that’s similar to yours, so it’s easier to see how the fee breakdown actually works and what the full cost is.

Common Factoring Contract Terms

If the initial quote aligns with your expectations and seems solid, get a copy of the contract as well. As you review it, keep an eye out for the terms outlined below.

Advance Rate: As touched on earlier, the factoring advance rate is the percentage of the invoice’s value that you receive upfront. It’s usually between 80 and 95 percent of the invoice’s value.
Reserve: As mentioned, the factoring reserve is the portion of the invoice held back until the customer pays, minus any fees.
Factoring Fee: This is the fee charged for purchasing and managing the invoice. It may be listed as a factoring rate, and is usually between one and five percent of the invoice’s value.
Recourse and Non-Recourse Terms: Most factoring agreements are recourse agreements. This means if your customer doesn’t pay their invoice by a specific time, you’ll need to ensure the factoring company doesn’t take a loss on it. Most will allow you to submit another invoice in its place or will use your reserves to cover the balance, but always confirm the details. Conversely, some factors offer non-recourse agreements, which means the factor absorbs the loss in specific situations, such as if your customer becomes insolvent. The cost is a little higher for this option.
Minimum Volume Requirements: This will tell you whether the agreement requires a certain number of invoices to be factored or a certain dollar threshold to be met each month.
Contract Length: Confirm how long the agreement lasts and whether it renews automatically.
Termination Notice Requirements: Even if you’re not tied into a long-term contract, most factors require at least 30 days’ prior written notice to end the agreement. This gives them time to wind down and collect on open invoices, and you will not be able to factor new invoices during this period. There may be other stipulations here or fees charged when you end the agreement, so read this section carefully.
Concentration Limits: See if there are restrictions on how much funding can be tied to one customer.
Credit Check and Due Diligence Fees: Additional costs may appear outside the main factoring fee. Keep an eye out for them in the contract and on the sample statement if you’re provided with one to review.
Same-Day or Next-Day Funding Terms: Find out whether fast funding is standard or only available in certain situations, and if there are any guarantees for timing, and what the cutoff time for invoice submission is when you want same-day or next-day payment.

Quick Tips for Choosing a Factoring Company

Once you have a few quotes in hand, it helps to compare factoring providers the way you would compare any long-term business partner. The right factoring company should offer terms that make sense for your cash flow needs while also providing a process and service model that work for your business.

Compare the Full Structure: Don’t focus exclusively on the core factoring fee, as the cheapest factoring companies often have stricter terms, slower funding, or added charges that impact the overall fit.
Ask How Funding Timing Really Works: Clarify when funds are typically sent after invoice submission and what can delay them.
Find Out How Customer Communication is Handled: The factor may interact directly with your customers, so it’s helpful to know in advance what their policies are.
Look for Experience in Your Industry: A company familiar with your invoice type may understand common documents, timelines, and risks better.
Review Contract Flexibility: Notice periods, minimums, and renewal terms can matter as much as pricing.
Ask Which Invoices Are Eligible: Not every customer or invoice may qualify under the same terms.
Clarify All Fees in Writing: This helps prevent confusion about setup charges, wire fees, or other costs.
Consider Responsiveness: A factoring company that answers questions clearly during the quote stage may be easier to work with after funding begins.

Step 5: Complete a Formal Application

Once you’ve chosen a factor to move forward with, you’ll complete a formal application and submit all your supporting documents. This does not lock you into an agreement. It just gives the factor permission to perform diligence.

However, you’ll want to watch for language tied to UCC filings. In some cases, factors file right away, which prevents others from making a claim against your receivables. This step can help ensure that a filing from another entity does not derail your plans to factor. However, if you don’t move forward with this company, they’ll need to have it removed before you can move forward with an alternate factor.

Step 6: Complete Underwriting and Verification

The next step in your small business factoring setup is underwriting and verification. Up to this point, the factor has likely only provided preliminary information based on the details you shared. During this stage, the factoring company takes a closer look at your business and receivables to confirm the invoices are real, review any liens or tax issues, and evaluate the end customers responsible for payment.

Most Common Underwriting Challenges When Getting Started with Factoring

Common reasons underwriting may slow down include existing UCC filings, missing or inconsistent documentation, disputed invoices, weak customer credit, or insufficient receivables volume. If these issues are not a concern and the invoices meet the factor’s requirements, your application may move toward approval.

Each customer account is usually evaluated on its own merit. Approval is often based on that customer’s creditworthiness and payment history, and the factor may set customer-specific limits or concentration guidelines to control risk. In practice, this means you can usually continue working with a customer even if their balance exceeds the factor’s approved limit, but invoices above that threshold may not qualify for funding.

Step 7: Sign the Agreement

Once you’ve cleared the underwriting stage and you’re approved, you’ll be given a factoring agreement to sign. Be sure to review it in detail and look for any differences between the one you’re being asked to sign and the one you received while you were evaluating the factor.

After the agreement is signed, your customers will typically be sent a notice of assignment (NOA). This simply tells them that ownership of their invoices has been transferred and provides them with the new remittance information. Most factors will also take care of the UCC filing at the same time.

Step 8: Factor Your First Invoice(s)

At this stage, it’s official. You’re approved for factoring, have signed the agreement, know the expectations, and your customers know where to send payments to. You can begin factoring.

Submission

With most modern factoring companies, you’ll submit your invoice and any required documentation through an online portal. From there, you’ll be able to track the status of the invoice and access general account information.

Verification

The factor will then verify the invoice. Sometimes, they can do this with just the documentation you provide or through other digital channels. Other times, they may reach out to the customer directly to verify it.

Advance

Once the invoice is verified, you will either receive your factoring advance that day or within a couple of days, depending on the terms of your agreement, the time of invoice submission, and whether you’ve requested expedited payment.

Step 9: Focus on Your Business

The factor collects payment based on the terms you set with your customer. In most cases, you won’t need to do anything during this stage. The factor will take care of everything from here on out unless there’s a client dispute.

Step 10: Receive the Reserve Minus Fees

Once payment comes in, the factor remits the remaining balance held in reserve, minus the agreed factoring fee. This sometimes happens right away, although there is usually a small delay while the factor waits for the payment to clear.

Get Started with Factoring Now

At Viva Capital, we offer same-day funding, flexible terms, specialized programs for many industries, and top-notch service, all backed by decades of experience helping small businesses across the country. If you’re ready to explore the fit more, request a free rate quote.