For small and mid-sized businesses in the United States, cash flow management often determines whether a company can grow, take on new contracts, or simply stay afloat.
Even profitable firms can find themselves short of working capital when clients take 30, 60, or even 90 days to pay invoices. Since the 2008 financial crisis, when traditional bank lending tightened significantly, many businesses have turned to alternative financing solutions. Among the most widely used are factoring and invoice financing, which unlock the value of unpaid invoices and provide immediate liquidity.
In the U.S. today, the International Factoring Association reports that factoring represents a $100 billion-plus industry, serving industries as diverse as trucking, staffing, manufacturing, and healthcare. This guide explains how factoring and invoice financing work, their differences, and why they remain vital financial tools for American companies.
What Is Invoice Factoring?
Invoice factoring is a financing arrangement in which a business sells its accounts receivable to a third-party company known as a factor. In exchange, the factor provides a cash advance—usually 70% to 90% of the invoice’s face value—and then takes over responsibility for collecting payment from the customer.
For example, a U.S. trucking company that invoices a shipper for $50,000 but won’t be paid for 60 days can sell that invoice to a factor. The factor might advance $45,000 immediately. Once the shipper pays in full, the factor remits the balance minus fees.
Factoring differs from traditional borrowing because it is not technically debt. By selling invoices, companies are transferring an asset rather than taking on a loan. This distinction makes factoring attractive to firms that want cash flow relief without increasing liabilities on their balance sheet.
What Is Invoice Financing?
Invoice financing, often called accounts receivable financing, is structured more like a loan. Instead of selling the receivable, the business uses it as collateral for borrowing. The financing company provides an advance based on the invoice value, but the business remains responsible for collecting payment from its customers.
Unlike factoring, where the customer pays the factor directly, invoice financing is usually invisible to the end client. However, since the business retains responsibility for repayment, it is considered a form of debt.
The U.S. invoice financing sector has grown significantly with the rise of fintech lenders. Allied Market Research projects global invoice financing volume will reach nearly $5 trillion by 2027, with the U.S. expected to remain one of the largest markets.
A Brief History of Factoring in the U.S.
Factoring has deep roots in the American economy. Its origins date back to colonial times when merchants used factors to advance payments against shipments of cotton, tobacco, and other commodities. In the modern era, factoring became essential for manufacturers and exporters, particularly during periods when bank lending was restricted.
After the 2008 financial crisis, factoring became a mainstream option for small and mid-sized businesses shut out of traditional credit markets. According to the International Factoring Association, factoring volume in the U.S. has steadily grown over the past decade, exceeding $100 billion annually by 2024. Today, thousands of companies across all 50 states use factoring to stabilize their cash flow.
A business owner reviewing invoices and calculating cash flow, highlighting the role of factoring and financing in managing working capital.
Comparing Factoring, Invoice Financing, and Invoice Discounting
While both factoring and invoice financing allow businesses to access funds tied up in unpaid receivables, the structure and risk allocation differ:
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Factoring: The business sells invoices to a factor, which assumes responsibility for collections. Customers pay the factor directly.
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Invoice Financing: The business borrows against receivables, using them as collateral. Customers continue to pay the business.
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Invoice Discounting (more common in Europe, less so in the U.S.): Functions like invoice financing but is often structured as a confidential arrangement.
For U.S. businesses, the choice often depends on whether they value discretion (invoice financing) or outsourced collections (factoring). Factoring may be more expensive but reduces administrative burden, while invoice financing preserves customer relationships but adds debt obligations.
Who Uses Invoice Factoring in the U.S.?
The stereotype is that invoice factoring is only for struggling businesses, but in reality it is widely used by healthy, growing companies across industries with long payment cycles.
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Trucking and Transportation: Factoring is particularly common in the U.S. trucking industry, where carriers often wait months for brokers and shippers to pay invoices. Immediate access to cash allows them to cover fuel, payroll, and maintenance.
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Staffing Agencies: Firms must pay workers weekly, even if clients pay invoices on 60- or 90-day terms. Factoring bridges that gap.
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Manufacturing and Wholesale: Companies use factoring to purchase raw materials and keep production running while waiting for large corporate clients to settle invoices.
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Healthcare Providers: Medical practices and billing companies factor insurance claims to smooth cash flow disrupted by slow reimbursement cycles.
These industries highlight factoring’s versatility across both small and mid-sized businesses.
Why Is Factoring So Popular in the U.S.?
Factoring’s popularity comes down to three main advantages: speed, flexibility, and accessibility. Unlike bank loans, which require credit checks and lengthy approvals, factoring decisions are based on the creditworthiness of the business’s customers. That means even startups or businesses with limited credit history can qualify.
Funds can be released within 24 hours, providing a rapid solution for urgent cash needs. And since invoices themselves act as collateral, businesses don’t need to pledge assets like property or equipment.
As the International Factoring Association notes, more than 35,000 businesses in the U.S. rely on factoring annually, a number that continues to grow as cash flow challenges persist across industries.
People Also Ask
Is factoring considered debt in the U.S.?
No. Factoring is the sale of an asset (the invoice), not a loan. Invoice financing, however, is classified as debt since the business must repay the borrowed funds.
What does factoring cost?
Factoring fees in the U.S. typically range between 1% and 5% of the invoice value per month. Costs vary by industry, customer payment history, and invoice volume.
Which U.S. businesses benefit most from factoring?
Industries with long payment terms—transportation, staffing, manufacturing, and healthcare—are the largest users. However, factoring can benefit any company facing cash flow gaps.
Is factoring regulated in the U.S.?
Yes, but regulations vary by state. Some states require licensing for factoring companies, while others impose disclosure requirements to ensure transparency of fees.
Conclusion
For U.S. businesses facing delayed payments and tight cash flow, factoring and invoice financing provide a practical solution. By converting receivables into immediate working capital, these tools allow companies to cover operating expenses, invest in growth, and reduce reliance on traditional bank loans.
Factoring is particularly valuable for industries where payment cycles are long and predictable cash flow is essential, such as trucking and staffing. Invoice financing, meanwhile, offers a more discreet option for businesses seeking liquidity without altering client relationships.
As the U.S. economy continues to evolve, factoring and invoice financing remain vital financial strategies. For many American businesses, they are not just emergency funding tools but essential enablers of long-term growth.
