What Is Invoice Factoring and How Does It Work?

​​​​​​​If you’re new to the staffing industry or are looking to grow, you may be wondering, “What is invoice factoring?” It may seem complex on the surface, but it’s actually a pretty simple concept.  

Let’s break it down.

It can often take 90 days or longer to receive payment from customers or clients​.​​ ​Invoice factoring, also called payroll factoring or payroll funding, gives you access to the instant cash flow you need to meet financial obligations.   

Staffing companies commonly rely on it because long waiting periods make it difficult to maintain operations and cover important expenses such as payroll, inventory, or utilities.  

Below, we’ll walk through the basics like how invoice factoring works, who’s involved, and a real example. 

How Does Invoice Factoring Work?

Invoice factoring for staffing agencies is a straightforward form of alternative financing. Essentially, it turns your accounts receivable (AR) into cash. Once you understand how it works, you can decide if it’s right for your business. ​Continue reading to learn more about the invoice factoring process and Encore’s invoice factoring options ​ 

Who’s involved in invoice factoring? 

​​​​​There are three primary parties involved in the factoring process:​​ 

• Your business (The seller) 
• Your customer (The debtor) 
• ​​Factoring company (The factor)​     ​​ 

​​Each party has certain obligations based on the type of factoring agreement. The main types include ​recourse and nonrecourse payroll factoring. We explain more about the process and how each of these parties interact below.​

The ​Invoice Factoring​ Process​ in 5 Steps 

While it might seem complex, there are only five​ ​key steps ​to​ ​the ​invoice factoring process:​     ​ 

1. You offer staffing services, then send an invoice to your customer/client (the debtor).
2. You submit the invoice to your factoring company​ (the factor)​ for cash funds.
3. The factoring company advances between 80% to 90% of the invoice to you (the seller), which gets deposited into your business bank account. If you’re working with a​n established factoring company partner​,​ like Encore Funding, ​you can receive funding in as little as​​  1 business day
4. The factoring company collects payment from your customer (the debtor).
5. Once the debtor submits their payment for the invoice, the factoring company pays the remaining balance to your business, minus the factoring fee. 

​​Invoice Factoring Example 

Factoring Step	$ Amount
Invoice Face Value	$40,000
Factoring Fee (Ex: 2%)	$800
Initial Cash Advance (Ex: 90%)	$36,000
Remaining Advance	$3,200
Total You Receive	$39,200

Industries that Use Invoice Factoring

I like to point out to newer staffing entrepreneurs that many of the nation’s top staffing agencies rely on invoice factoring to meet critical needs from managing payroll and purchasing supplies to covering overhead costs, paying vendors and investing in marketing services.  

Some top staffing-related industries that commonly use invoice factoring include: 

• Transportation 
• Healthcare  
• Manufacturing  
• Construction  
• Service providers which may include security companies, IT service providers, consultants, marketing firms, accountants and janitorial companies 

Not in any of those industries? Invoice factoring can still be for you. See why below. 

The Benefits of Invoice Factoring  

In addition to instant access to cash for your business, there are a few more advantages of invoice factoring to be aware of: 

• Easier and faster approvals. Compared to traditional banks and lenders that make it tough to get a loan, ​invoice factoring is more widely available to startup or small staffing agencies​.  If you just launched your staffing business, you know that getting a loan is tricky because you have limited collateral and finance history. Invoice factoring companies care less about those limitations and more about your customers (debtors) ability to pay their invoices.
• Limited risk. Unlike traditional bank loans, which require collateral, invoice factoring is unsecured. Therefore, you won’t lose sleep over valuable assets being seized if your customer refuses to submit payment for the invoice. 
• More flexibility for YOUR customers. Having increased cash flow means you’re able to give customers some additional leeway with payment terms. Instead of mandating immediate payments, you can accommodate their standard turnaround times (30 to 90 days, typically) without worrying about how they will impact your staffing agency. 
• Easy, straightforward process. Once you set up an account with an invoice factoring company like Encore, you should be able to receive funding within hours of submitting an invoice. We make the process simple and quick so you can focus on running your business.
• Customers won’t know the difference. If you’re worried that your customers/clients will get confused about invoice factoring, we can assure you that this won’t be a problem. With partners like Encore, all paychecks, invoices and tax filings will bear your company’s name along with referencing your name on the lockbox remittance address. If there is a need to contact your customer, you get notified well in advance.  

 

Is Invoice Factoring Right for Your Staffing Agency?

Whether you’re a startup or a growth-minded staffing agency, invoice factoring is one of the best opportunities to keep cash flowing to reach your goals. However, it’s important to work with a partner that’s dedicated to the staffing industry and can tailor factoring solutions to support your specific stage, market and objectives.  

At Encore, we’re a quick, flexible payroll funding partner for staffing agencies of all stages and sizes. We offer both money-only invoice factoring and full-service invoice factoring.  

Learn the differences between money-only factoring and full-service factoring. 

Contact Encore Funding 

I consider payroll funding to be a gateway to reaching goals and growth. Interested in invoice factoring for your staffing agency? Let’s talk! Reach out to the Encore Funding team today or apply now. 

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FAQs  

1. What is invoice factoring in the staffing industry?
Invoice factoring, also known as payroll factoring, is a funding solution where a staffing agency sells its unpaid invoices to a factoring company like Encore Funding in exchange for immediate cash. This helps agencies cover payroll, operating expenses, and growth initiatives without waiting 30–90 days for client payments. 

2. How quickly can a staffing agency get funds through invoice factoring?
At Encore Funding, staffing agencies can often receive up to 90% of their invoice value within 24 hours of submission. The remaining balance, minus a small factoring fee, is paid once the client settles the invoice.

3. Is invoice factoring the same as a loan?
No. Invoice factoring is not a loan; it’s the sale of accounts receivable. Unlike bank loans, invoice factoring doesn’t add debt to your balance sheet and doesn’t require collateral like property or equipment. Approval depends more on your customers’ creditworthiness than on your agency’s financial history.

4. What types of staffing companies use invoice factoring?
Invoice factoring is common among staffing agencies in industries such as healthcare, transportation, construction, manufacturing, IT, and security. However, any staffing agency that needs reliable cash flow while waiting on client payments can benefit from this funding option! 

5. How does invoice factoring affect relationships with clients?
When done with an experienced payroll funding partner, invoice factoring has little to no impact on client relationships. Invoices and paychecks remain in your company’s name, and clients simply continue paying as usual, often without realizing a factoring company is involved.