A factoring company funds its book with owner equity first, then a bank facility secured by the receivables portfolio, often called a rediscount or warehouse line. The lender advances against a borrowing base of eligible receivables, sets covenants and reporting, and charges a cost of funds that decides what spread the factor keeps.
Search this question and you get answers written for the carrier: should my trucking business factor or take a line of credit. That’s a different question. This one is for the operator on the other side of the desk, the one whose cash is going out the door every time an invoice funds, who has run out of equity to grow on and is trying to understand what a lender is going to ask for.
We should say up front what this page is and isn’t. It’s an operational explainer of how the structure works and what a lender examines. It is not advice on raising capital, choosing a lender, or accepting terms, and no page can tell you whether you’d be approved or on what terms. Facility documents, covenants, and inter-creditor agreements are legal instruments; those go to qualified counsel, the same way we route UCC perfection in our start-up guide.
Phase one is your own money
Every factor starts here. When you advance against an invoice you’re fronting your own cash and waiting on a broker or shipper to pay, so your capital pool has to cover every advance outstanding at once plus a reserve for disputes and slow-pays. We size that in Step 1 of the start-up guide, and it’s the number that sets how large a book you can carry before anything else matters.
Equity has one enormous advantage: nobody tells you what you can fund. It also has a hard ceiling. Your book can only grow to the size of your own balance sheet, and every dollar sitting in an outstanding advance is a dollar you can’t use to onboard the next client. Factors hit that wall faster than they expect, usually right after they land the account that finally makes the operation look real.
Phase two is a facility against the portfolio
The second phase is credit banking: a revolving facility from a bank or a commercial finance company, secured by your receivables portfolio. In factoring circles it’s usually called a rediscount line, sometimes a warehouse line. The mechanics are the ones asset-based lenders have used for decades. You pledge the receivables you’ve purchased, the lender advances a percentage of the eligible ones, you draw to fund new invoices, and collections pay the facility back down.
Renee wrote about which institutions actually understand freight factoring, and why applying too early can work against you, in Finding Your Financial Foundation. The short version of the timing: FRC’s published guidance is that a bank facility realistically comes after 12 to 24 months of clean operating history, audited financials, and portfolio performance a lender can read. Outside sources set the bar higher still, with one lender-facing blog putting it at two to three years of operating history before a factor qualifies for a rediscount facility. Treat both as ranges other people have published, not as a rule. The lender decides.
The borrowing base is the number that sets your capacity
This is the concept that decides everything downstream, and it’s the one most new factors have never had to think about, because until now they were the ones setting advance rates rather than living under someone else’s.
A borrowing base is a formula. The Secured Finance Network describes it plainly: asset-based lenders use a borrowing-base formula derived by multiplying the value of eligible collateral by an advance rate, and it puts typical advance rates at 75 to 80 percent of eligible receivables in general asset-based lending. Your available capacity at any moment is that formula’s output, not the face value of your book and not the size of the commitment on the front page of the agreement.
So two numbers move your capacity. One is the advance rate, which is negotiated and then fixed. The other is the eligible collateral balance, which changes every single day as invoices fund, collect, age, and get disputed. Operators who only watch the first number get surprised by the second.
What a lender rules ineligible, and why it lands on your equity
Eligibility is where the borrowing base gets its teeth. An invoice sitting in your portfolio is not automatically collateral the lender will count. Bank examiners are instructed that an account is normally considered ineligible collateral when it’s past due by three times the terms, which is 90 days on standard 30-day terms, and that lenders whose borrowers have a concentrated customer base should limit concentrated accounts to no more than 10 to 20 percent of the receivables borrowing base or reduce the advance against them. The same handbook names dilution as a core exposure: non-cash credits like returns, disputes, and bad debts that quietly reduce the receivable balance.
Read that list again as an operator and you’ll notice something. Those are the same three numbers you already track monthly: aging, concentration, and dilution. They’re on the IFA’s list of metrics a factoring company should monitor, and we’ve written a whole page on holding a concentration line. What changes in phase two is the consequence. A concentration that used to be a risk-management judgment call becomes an ineligible that shrinks your available cash this week.
Here’s the part nobody writes down. There are two advance rates stacked on top of each other, and the gap between them is permanent equity. You advance a percentage of face value to your carrier client. The lender advances a percentage of eligible receivables to you. Whatever the lender won’t advance against, and everything it rules ineligible outright, you fund from your own balance sheet. An aged invoice doesn’t just hurt your yield. It converts from leveraged collateral into equity you can’t redeploy. That is the real reason collections discipline tightens the month a facility closes, and it’s why we treat aging as a funding metric and not only a risk metric.
Covenants, reporting, and the field exam
A facility comes with obligations that outlast the closing. Expect regular borrowing-base certificates and aging reports, financial covenants, and negative covenants restricting additional liens, additional debt, and changes to the business. The specific terms are negotiated and documented, which puts them squarely in counsel’s territory, not ours.
The part FRC can speak to is the examination, because it lands on your operation. Collateral field exams remain standard practice in asset-based lending. In a Secured Finance Network roundtable published in December 2025, one lender described running comprehensive field exams every six months, with system access reviews, and another described pre-funding and post-funding UCC searches with continuous lien monitoring. One participant put the standard bluntly: they don’t just confirm that invoices exist, they confirm the goods were actually shipped, received, and billed correctly.
For a factor, that’s an audit of the operation you already run. Can you produce a rate confirmation, bill of lading, and proof of delivery for any funded invoice on request? Does your aging in the system reconcile to your aging in the report you just certified? Are your UCC filings on your own clients current and searchable? A factor with clean verification files and reconciled reporting walks through a field exam. A factor whose verification quietly loosened under volume finds out during one.
There’s a factoring-specific version of this worth knowing about. In an IFA Commercial Factor Q&A about completing a facility for a factoring company, the lender described what it looked at in the factor’s own operation: what KYC and credit policies the factor had, and how it monitored its portfolio. Same interview, a detail worth sitting with: that lender said it has let clients use its own field examiners and has helped factors write and set up internal policies. Lenders to factors are underwriting your operating discipline, not only your collateral.
Cost of funds and the spread you actually keep
The last piece is arithmetic, and it’s the one that connects the facility back to your pricing. You earn a discount fee on the invoices you purchase. You pay interest on the facility that funded them, plus the facility’s own fees. What’s left, before operating costs, is your net spread.
Two consequences follow. The first is that cost of funds is a valuation input, not just an expense line. Our page on what drives a factoring company’s value covers how buyers grade it. The second is that leverage cuts both ways: a facility lets you fund a book several times the size your equity alone would carry, and it also means the spread on every invoice is now split with a lender who gets paid whether or not that invoice collects on time. If your advance rate, fee schedule, and reserve policy weren’t internally consistent before, borrowing money doesn’t fix that. It multiplies it.
What we tell operators about phase two
The factors who get through this well are the ones whose operation was already boring. Reconciled reporting, current UCC filings, verification files a stranger can follow, aging that matches what they say it is. Lenders don’t reward improvisation, and neither does a portfolio.
FRC’s founder, Renee Williams, built a freight factoring company from the ground up across 25+ years, managing large invoice portfolios, leading credit and underwriting operations, and designing collections infrastructure at scale. Financial reporting is one of the six domains in FRC’s 90-Day Operational Audit, alongside collections, onboarding, risk, technology, and staffing, and it produces a written assessment and a prioritized 12-month roadmap. What we do is help you get the operation and the reporting into the shape a lender examines. What we don’t do is arrange financing, recommend a lender, or tell you what terms to accept. FRC is a consultancy: we advise and audit, we don’t fund invoices or purchase receivables. Call 800-648-5450 if you want an honest read on where your operation stands. Renee picks up directly.