What is factoring? Meaning and examples

Factoring receivables is a type of financing where businesses convert unpaid invoices into immediate cash by selling them to a factoring company. Also known as accounts receivable factoring, it helps businesses improve cash flow without waiting for customers to pay. In most cases, you receive a large portion of the invoice amount—often within 24 hours—directly to your bank account. That means you can keep your business moving without delays.

Here’s how it works: you deliver a product or service, issue an invoice to your customer, and then transfer that invoice to a factoring company. They advance you a percentage of the invoice and collect the payment from your customer later. There are different types of factoring available, including recourse, non-recourse, and spot factoring, depending on how much risk you’re willing to transfer and how much control you want to keep over client communication.

Factoring is widely used by small businesses, startups, and growing companies across industries like logistics, healthcare, manufacturing, and construction—especially when dealing with long payment terms.

Table of contents

1. Pros and cons of factoring
2. Factoring for freelancers and sole proprietors
3. Factoring for small businesses
4. How much does factoring cost?
5. What Payt can do for you

Pros and cons of factoring

Pros

• Get paid faster and improve cash flow
• No more chasing late payments or unpaid invoices
• More time for your core business
• Easier to invest and grow without taking on loans
• Reduces reliance on traditional financing methods

Cons

• Fees can add up, especially with high invoice volumes
• You may lose control over customer communication and collections
• Not all clients or invoices may qualify

Factoring is a solid option, but it’s important to compare it to alternatives like small business loans or automated cashflow management software. What works best depends on your financial goals, risk tolerance, and how much control you want to keep.

Factoring for freelancers and sole proprietors

If you’re a freelancer or independent contractor, you know how critical cash flow is. A delayed payment can impact everything—from personal expenses to investing back into your business. With factoring, you don’t have to wait 30, 60, or even 90 days for clients to pay. Instead, you get paid right away.

This lets you plan better, invest in tools or marketing, and operate with peace of mind. For those who don’t have the time or experience to manage receivables, factoring takes the stress out of collections. Some factoring companies even take on the risk of non-payment, especially with non-recourse factoring.

Still, factoring comes at a cost. If you’re looking for a more cost-effective alternative that helps you get paid faster while keeping full control, Payt might be the smarter choice.

Factoring for small businesses

Small businesses often operate on tight margins. Waiting on payments from big clients can slow down operations or stall growth. Small business factoring helps close that gap by providing immediate cash, allowing you to reinvest in inventory, hire staff, or manage seasonal spikes.

In fast-growing companies, factoring gives you the flexibility to move quickly. Plus, many factoring providers offer online platforms where you can upload invoices, track payments, and monitor cash flow in real time. However, outsourcing collections might mean giving up some control over client relationships.

That’s where Payt is different. You get all the benefits of fast payments but stay in control of your customer communication and brand experience.

How much does factoring cost

Factoring costs usually include a percentage fee (typically between 1% and 5% of the invoice) and sometimes a flat fee per invoice. Rates depend on your industry, invoice volume, customer creditworthiness, and payment terms. The longer your customers take to pay, or the riskier the invoice, the higher the fee.

What does factoring cost with Payt?

Unlike traditional factoring receivables services that charge a percentage of every invoice, Payt’s pricing is simple, transparent, and based on automation—not on your revenue. Instead of selling your invoices, you keep them in your hands—and we help you manage them smarter. Our software automates the entire receivables process, from sending invoices to sending reminders and tracking payments.

On average, companies using Payt get paid 30% faster and save up to 80% of the time they normally spend on admin. All without involving a third party. That means lower cost, more control, and stronger client relationships.

What Payt can do for you

At Payt, we believe getting paid faster shouldn’t come at the cost of losing control. That’s why we built software that automates your entire accounts receivable process—without handing your invoices over to a third party.

With Payt:

• You automate invoice sending, reminders, and follow-ups
• Your follow-up flows through email, text, or even postal mail
• Your customers can pay instantly via payment link or QR code
• You get full insight into payment statuses, down to the minute
• You integrate Payt directly with your existing accounting software

By using Payt, you save up to 80% of your admin time, get paid 30% faster, and keep full control over your communications and cash flow. It’s everything factoring promises—without losing your grip on the process.

Schedule a free demo and discover how our software makes your credit management smarter, faster, and more personal. See firsthand how you can gain more control over your invoices and get paid faster.