# Invoice factoring: the "3% fee" that's really 48% By MCAFax · Published August 11, 2026 · Updated October 16, 2026 Section: Business Funding › Equipment & Invoice Finance · Series: The Funding Playbook (https://mcafax.com/notebook/series/the-funding-playbook) Canonical: https://mcafax.com/notebook/what-is-invoice-factoring-and-how-does-it-work-for-small-businesses Source: MCAFax, The Broker's Notebook (https://mcafax.com/notebook). MCAFax is not a lender or a law firm. --- Your client owes you $20,000 on net-60. Payroll is Friday. A factoring company offers you $17,000 by tomorrow for "just 3%." That 3% is real, but it's a monthly rate, and it keeps running until your client pays. Invoice factoring means selling your unpaid B2B invoices to a company (the "factor") for cash now. It can save a business with slow-paying clients. Here's the one number to work out before you sign: the fee as an annual rate, based on how long your client really takes to pay. ## How factoring works 1. You invoice a business or government client on net-30 to net-90 terms. 2. The factor checks your client's credit (not yours) and advances you 70% to 90% of the invoice, often within a day or two. 3. Your client gets a notice of assignment telling them to pay the factor. Under [UCC § 9-406](https://www.law.cornell.edu/ucc/9/9-406), once they get that notice, paying you no longer counts. 4. When your client pays, the factor sends you the rest of the invoice (the "reserve"), minus its fee. Most factors also file a [UCC-1 lien](https://mcafax.com/notebook/guides/why-brokers-call-you) on your receivables. That filing is public, and it's one reason the broker calls start the week after you fund. ## The math on a real invoice Here's a $20,000 invoice. The advance rate is 85%, and the fee is 3% for the first 30 days plus 1% for every 10 days after that. - Cash today: 85% of $20,000 = $17,000. - Your client pays on day 45, not day 30. The fee is 3% + 1% + 1% = 5%, or $1,000. - The reserve you get back: $20,000 - $17,000 - $1,000 = $2,000. - What it really cost: $1,000 to use $17,000 for 45 days. That's 5.9% in a month and a half, or about 48% a year. If your client pays on day 20, the same contract costs about 64% a year ($600 on $17,000 for 20 days). It's still a fee you could live with if it saves a contract. But "3%" alone doesn't tell you the cost. Run your own invoices through the [cost-of-capital calculator](https://mcafax.com/notebook/toolkit/cost-of-capital-calculator). ## Recourse vs. non-recourse With recourse factoring, if your client doesn't pay, you buy the invoice back. Non-recourse factoring usually only covers your client going insolvent. It costs more, and it almost never covers a dispute ("the work was late"). Read the buyback clause before you read anything else. ## When factoring is the wrong call - You sell to consumers. Restaurants and retail shops don't have B2B invoices to sell. - Your margins are thin. At a 5% fee on a 6% margin, you're working for the factor. - Your client already pays slowly. Every extra 10 days adds to the fee. - You qualify for a revolving line. SBA 7(a) CAPLines (covered in [SOP 50 10 8.1](https://www.sba.gov/document/sop-50-10-lender-development-company-loan-programs)) cost less if you can wait a few weeks for approval. Our [SBA 7(a) playbook](https://mcafax.com/notebook/how-to-get-an-sba-7a-loan-without-getting-hooked-by-brokers) explains what lenders check. If factoring is the wrong call for you, compare the cheaper paths first in [merchant cash advance alternatives](https://mcafax.com/notebook/merchant-cash-advance-alternatives), ranked cheapest first, and in our guide to [working capital loans](https://mcafax.com/notebook/working-capital-loans). ## Before you sign 1. Ask for the fee schedule in 10-day steps, in writing. 2. Ask for every other fee: setup, wire, credit check, monthly minimums, and early termination. 3. Find out if you have to factor all your invoices or can pick which ones ("spot factoring"). 4. Look up any broker who brings you the deal at [MCAFax.com/verify](https://mcafax.com/verify). Last updated: October 16, 2026 ## Questions readers ask **Does factoring hurt my credit?** Factoring is a sale, not a loan, so it usually doesn't show up as debt. The UCC-1 lien is public, though, and other lenders will see it. **Will my clients know?** Yes, with standard factoring. They get a notice to pay the factor. With "invoice discounting," you keep collecting from your clients yourself, but it's harder to qualify for. **Is factoring the same as a merchant cash advance?** No. A factor buys specific invoices from you. A merchant cash advance buys a slice of your future sales and takes daily debits until it's paid back.