Understanding Invoice Factoring and How It Works

Delayed customer payments are more than just an inconvenience. They are a systemic challenge for growing businesses in India. A recent survey found that 52% of MSME B2B payments are overdue by more than 90 days. For startups and SMEs, this kind of delay can choke working capital and stall operations just when momentum is building.

In response, more founders are exploring capital solutions tied to their receivables. One option gaining popularity is invoice factoring, a faster, founder-friendly approach to staying liquid and growth-ready, even when customer payments are stuck.

​​ Key Takeaways

• Invoice factoring unlocks tied-up capital – Businesses sell unpaid invoices to a factoring company and receive most of the value upfront, improving liquidity without waiting for long payment cycles.
• It differs from invoice financing – Unlike financing, where you borrow against invoices, factoring involves transferring invoice ownership, and the factoring partner handles customer collections.
• Fast cash flow boost – Typically, 75–90% of invoice value is paid within 1–3 days, giving SMEs and startups immediate access to funds for payroll, inventory, or growth.
• Best suited for growth-focused businesses – Especially valuable for SMEs and startups struggling with delayed B2B payments, as it helps maintain operations and scale without heavy debt.
• Comes with pros and cons – While it reduces cash flow stress and outsourcing collections lowers overhead, it may involve fees (1–5%), long-term contracts, and less flexibility if customer creditworthiness is weak.

What is Invoice Factoring?

Invoice factoring, also known as accounts receivable factoring, is when a business sells its unpaid invoices to a third party in exchange for immediate cash. The factoring company pays most of the invoice amount upfront and collects the full payment directly from the customer.

It is different from invoice financing, where the business keeps the invoice, borrows against it, and continues to handle customer collections.

Also Read: Receivable Financing vs Factoring: Key Differences

How Does Invoice Factoring Work?

Invoice factoring typically follows these steps:

1. Raise the invoice: You bill your customer for goods or services delivered, with payment due in 30, 60, or 90 days.
2. Approach a factoring partner: You share the invoice and basic business documents with a factoring company to apply for funding.
3. Get an upfront payout: The factor verifies the invoice and your customer's credibility. If approved, they transfer 75% to 90% of the invoice value to your account, usually within 1 to 3 working days.
4. Customer pays the factor: On the due date, your customer pays the full invoice amount directly to the factoring company.
5. Receive the balance: Once payment is received, the factor sends you the remaining amount after deducting their fee.

Example

You issue an invoice for ₹10,00,000 with a 60-day payment term.

• A factoring company approves your request and transfers ₹8,50,000 within 48 hours (85% advance).
• When the customer pays the full invoice amount after 60 days, the factor deducts a ₹50,000 fee.
• You receive the remaining ₹1,00,000.

Instead of waiting two months, you get most of the cash immediately and avoid the strain on your working capital.

Pros and Cons of Invoice Factoring

Invoice factoring offers several advantages for growing businesses, but it also comes with trade-offs. Here's a quick look at the key pros and cons:

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Conclusion

Invoice factoring gives fast-growing businesses a way to access capital without waiting months for customer payments. It's a reliable option for improving cash flow and supporting ongoing operations, especially when your sales are steady, but your working capital is stretched.

At Recur Club, we help you tap into the right invoice factoring partners by working with 150+ trusted lenders, so you get the best terms for your business stage and cycle.

Got pending invoices? We help you turn them into fast, founder-first funding, without chasing collections or losing control.

Why Choose Recur Club? 

✔ Up to ₹100 Cr in funding without delays
✔ No customer relationship hampered
✔ Funds in bank within 72 hours to power your next move 

Talk to us today!

FAQs

1. Can I choose which invoices to factor?

Yes. Most lenders, including Recur Club, allow selective invoice factoring. You decide which approved invoices to convert into upfront working capital.

2. Are there any alternatives to invoice factoring?

Yes. You can explore working capital loans, revenue-based financing, term loans, venture debt, and more, depending on your business size and growth goals.

3. Will my customers know I have factored their invoices?

With confidential factoring, customers are not notified. Recur Club offers this structure, so your business relationships remain unaffected.

4. Does invoice factoring affect my balance sheet?

No. Since you are selling an asset, it does not add debt or dilute ownership. It also keeps your leverage ratios stable.

5. What percentage does invoice factoring take?

Typically, between 1% to 5% of the invoice value, depending on risk profile, payment terms, and your customer's creditworthiness.

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