Invoice factoring allows subcontractors to receive payment on outstanding invoices immediately, rather than waiting 30, 60, or 90 days for the client to pay. But is the fee worth it? The answer depends on your specific situation.
How Invoice Factoring Works
You submit an invoice to your client as normal. Instead of waiting for the client to pay, you sell the invoice to a factoring company (or use a factoring feature within your invoicing platform) at a discount. The factoring company advances you a percentage of the invoice value, typically 80-95%, within hours or days. When the client pays the invoice, you receive the remaining balance minus the factoring fee.
What It Costs
Factoring fees typically range from 1% to 5% of the invoice value, depending on the speed of advance and the creditworthiness of your client. Instant funding (within 30 minutes) typically costs 2-3%. Next-day funding costs 1-1.5%. Some platforms offer dynamic pricing based on the GC's payment score, so invoices from reliable payers get lower fees.
When Factoring Makes Sense
Factoring is a smart financial tool when you need funds to purchase materials for a new job and the cost of not taking the job exceeds the factoring fee. It makes sense when a large invoice is tying up your cash flow and you have payroll obligations to meet. It's valuable when you can earn a return on the capital that exceeds the factoring cost, such as taking an early payment discount from a supplier.
When Factoring Doesn't Make Sense
If you're factoring every invoice because you can't manage cash flow, that's a symptom of deeper problems like underpricing, overspending, or poor financial management. Factoring should be a strategic tool, not a life support system. Also, if your clients typically pay within 15-20 days, the factoring fee may not be worth the few days of acceleration.
Comparing Your Options
Traditional factoring companies often require you to factor all invoices, charge monthly minimums, and lock you into long-term contracts. Newer platforms let you factor individual invoices on demand with no minimums or long-term commitments. This selective approach lets you use factoring strategically when the math makes sense.
The Bottom Line
Invoice factoring is neither universally good nor universally bad. It's a financial tool that, when used strategically, can solve specific cash flow problems and create opportunities. The key is understanding the true cost, comparing it to your alternatives, and using it selectively rather than habitually.