Awareness Guide

What Is Invoice Factoring? A Plain-English Guide.

How it works, how it differs from a loan, what it costs, and which businesses it’s designed for. Written for CFOs, controllers, and owner-operators who’ve heard the term but want the real explanation before making a decision.

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The Plain-English Answer

Invoice Factoring, Defined

Definition

Invoice factoring is when a business sells its unpaid invoices to a funding company — called a factor — in exchange for an immediate advance on most of the invoice's value. The factor then collects payment directly from the business's customer when the invoice comes due. The business gets capital now instead of waiting 30, 60, or 90 days for payment.

The Process

The 4-Step Process

You submit an invoice

You issue an invoice to your business customer as normal. You submit it to Sigma through a short online form — no financial statements required at this stage.

We verify and approve

A licensed underwriter reviews the invoice and your customer's creditworthiness. Not an algorithm — a human who understands your industry.

You receive your advance

We wire the advance — a large percentage of the invoice face value — directly to your operating account. Your cash flow gap is closed.

Your customer pays us

When your customer's payment terms come due, they pay Sigma directly. We send you the remaining invoice balance minus our fee. Transaction complete.

A Critical Distinction

Invoice Factoring Is Not a Loan

This distinction matters for your balance sheet, your bank covenants, and your CFO's approval. Factoring is the sale of a receivable — a commercial transaction, not a debt instrument.

AR Funding

Structure

Balance Sheet

Covenant Risk

Approval Based On

Repayment

Personal Guarantee

Invoice Factoring

Sale of a receivable — not borrowing

No debt added — off-balance-sheet

None — doesn't trigger bank covenants

Your customers' creditworthiness

From your customer's payment — not your revenue

Not required

Bank Loan / Line of Credit

Debt instrument — you borrow and repay

Debt appears on balance sheet; affects ratios

May trigger financial covenants; violations costly

Your business credit, financials, operating history

From your operating account, on a schedule

Often required, especially for smaller businesses

Compare Your Options

Invoice Factoring vs. Bank Line of Credit vs. MCA

The three ways B2B businesses most often fund the gap between invoicing and getting paid. For the full detail, read factoring vs. a line of credit and factoring vs. an MCA.

	Invoice factoring (Sigma)	Bank line of credit	Merchant cash advance
Based on	Specific invoices owed by your B2B customers	Your business credit score, financials, and operating history	Your future business revenue or card sales
Repayment	Paid when your customer pays the invoice — not from your revenue	From your operating account, on a schedule	Daily or weekly % of card sales / bank deposits — out of your operating account every day
Effect on your cash flow	None — advance comes from customer's payment, not your revenue	—	Reduces your daily available cash until balance is cleared
Time to funding	Set up in 24–48 hours, then invoices funded the same day	Weeks to months — underwriting, committee review, covenant setting	—
Balance sheet	No debt added — a sale of receivables, not a loan	Debt appears on balance sheet; affects debt-to-equity ratios	—
If a customer doesn't pay	By default you replace the invoice. Optional credit insurance covers a customer who doesn't pay.	—	Irrelevant — you repay the full advance regardless of what your customers do
Cost	One flat fee per invoice — shown in full before you sign. Based on your customer's credit and industry.	Interest rate disclosed upfront, but total cost depends on utilization and duration — can be difficult to model accurately	Factor rate (typically 1.2–1.5×) — effective APR can be very high and is difficult to compare against other products

Ideal Fit

Who Invoice Factoring Is Designed For

Factoring is not a last resort. It is working capital infrastructure for businesses whose growth is outpacing their cash cycle — which is most B2B businesses at some point.

Strong Fit

B2B businesses with creditworthy customers on net terms

Staffing agencies, manufacturers, distributors, construction subcontractors, professional services firms, trucking companies, healthcare providers with institutional payers. If your customers are businesses or government entities and pay on 30–90 day terms, factoring is designed for exactly your situation.

Strong Fit

Growing businesses whose A/R is outpacing available capital

If you've had to decline contracts because you couldn't fund the upfront costs while waiting for payment, factoring is the mechanism that closes that gap. It scales with your revenue — the more invoices you issue, the more capital you can access.

Weaker Fit

Consumer-facing businesses (B2C)

Factoring advances against B2B invoices — not consumer receivables. Restaurants, retail, and e-commerce businesses generally don't have the invoice structure that factoring requires. An MCA or business line of credit may fit better.

Weaker Fit

Businesses needing general-purpose capital

Factoring unlocks capital from existing receivables — it's an A/R tool, not a general-purpose credit facility. If you need capital for equipment, inventory unrelated to a specific invoice, or operational expenses, a bank line may be the better vehicle.

Pricing

What Does Invoice Factoring Cost?

Sigma's Approach to Fees

Sigma charges one flat discount fee per invoice factored — not a percentage published on a rate sheet, because the right fee depends on your industry's risk profile, your customer's creditworthiness, and your invoice terms. Your exact fee is shown in full before you sign anything. No surprises. No hidden charges. No wire fees, no monthly minimums, no setup fees. To get a real-time estimate of what factoring would cost for your invoice volume, use the Capital Estimator. It won't replace your actual proposal — but it will give you a working number for your own analysis.

The Plain-English Answer

Recourse Factoring and Credit Insurance

With recourse factoring, if your customer doesn't pay, you buy back or replace the invoice. Recourse is Sigma's standard structure because it costs the least. To protect against a customer who doesn't pay, Sigma offers optional credit insurance. Sigma doesn't offer non-recourse factoring, which costs more and covers far less.

Why We Don't Offer Non-Recourse

Non-recourse factoring covers a customer's bankruptcy or insolvency only. It does not cover a customer who pays late, stops paying, or disputes the invoice over the goods or services delivered, and it costs more. If you want protection from non-payment, ask about credit insurance.

Compare All Three Options

Common Questions

Questions First-Time Buyers Always Ask

See all FAQ questions

Will my customers know I'm using factoring?

Yes. A Notice of Assignment (NOA) is sent to your customers, directing them to remit payment to Sigma. This is a standard part of the factoring process — it is not unusual for B2B businesses, and your customers have almost certainly encountered it before. Sigma handles all customer contact professionally on your behalf, exactly as you would want them to be treated.

Is there a minimum volume or invoice size?

No minimum invoice size and no minimum monthly volume. You can factor one invoice or a full portfolio — entirely on your schedule. Sigma structures solutions around your actual situation rather than requiring you to hit an arbitrary threshold.

Does factoring affect my existing bank relationship or covenants?

Factoring is a sale of receivables, not a loan — it does not appear on your balance sheet as debt and is structured to coexist with most bank credit facilities. We file a UCC-1 against your receivables, which is standard in factoring and subordinate to most existing bank liens. We review your existing agreements before onboarding to ensure there are no conflicts.

Is there a long-term contract?

No. Our standard agreement is month-to-month with 30 days notice prior to renewal. There is no annual commitment and no termination penalty. We can also build custom exit provisions into your agreement — including clauses tied to specific events, like a bank line of credit becoming available.

How quickly can I get funded?

Onboarding typically takes 24–48 hours from signup while we set up your account and verify your first invoices. Once your account is active, invoices you submit are funded the same day.

Do I need strong business credit to qualify?

No. We evaluate your customers’ creditworthiness — not yours. If your customers are creditworthy businesses, government entities, or established institutions, your invoices likely qualify regardless of your own business credit history. This is one of the primary reasons businesses that can’t qualify for bank financing use factoring.