Invoice Factoring FAQ

What is invoice factoring?

Factoring invoices (also called accounts receivable financing) is the act of selling your open accounts receivable to an invoice factoring company for a percentage of the value. The factoring company advances up to 98% of the invoices’ value and bills your customers. Once it is paid in full, the remainder of the discount is returned to your business, minus a factoring fee. Business invoice factoring is an alternative financing option that helps business owners in all stages – from those just starting up to well-established companies. It improves your business’ cash flow so you no longer have to wait months for the money from your customers.

The process of how invoice factoring work is straightforward and beneficial for businesses. By choosing a suitable factoring company, businesses can easily convert outstanding invoices into immediate working capital, supporting their financial obligations and maintaining operations.

How Invoice Factoring Works with an Invoice Factoring Company

Invoice factoring with an invoice factoring company is a straightforward process that provides businesses with immediate access to cash flow. Here’s how it works:

1. Submit Invoices: A business submits its outstanding invoices to the factoring company.
2. Invoice Purchase: The factoring company purchases the invoices at a discounted rate, typically between 70% to 90% of the invoice value.
3. Advance Payment: The factoring company advances the discounted amount to the business, providing immediate cash flow.
4. Customer Payment Collection: The factoring company collects payment from the business’s customers.
5. Final Settlement: Once the customers pay the invoices, the factoring company returns the remaining balance to the business, minus a factoring fee.

By working with an invoice factoring company, businesses can improve their cash flow, reduce the risk of bad debt, and increase their ability to pay bills and expenses on time. This process ensures that businesses have the necessary funds to operate smoothly without waiting for customers to settle their accounts.

How will factoring invoices help my business?

While invoice factoring has plenty of benefits, many businesses partner with factoring companies because they can receive fast financing with zero debt added to their balance sheet. Invoice factoring helps companies avoid needless overhead costs while they build and improve their own credit. Factoring fees can vary based on factors such as the monthly volume of invoices sold and the type of factoring agreement (recourse or non-recourse). The invoice factoring cost typically ranges from 1% to 5% and is determined by elements like the business industry, sales volume, and specific services provided by the factoring company. Steady cash flow from factoring enables companies to weather seasonal highs and lows, slow-paying customers and unexpected growth.

Costs and Fees Associated with Invoice Factoring

The costs and fees associated with invoice factoring can vary depending on the factoring company and the terms of the agreement. Here are some common costs and fees to be aware of:

1. Factoring Fee: This is the fee charged by the factoring company for their services, typically ranging from 0.5% to 5% of the invoice value.
2. Discount Rate: This is the percentage of the invoice value that the factoring company deducts as their fee.
3. Advance Rate: This is the percentage of the invoice value that the factoring company advances to the business.
4. Reserve Requirement: This is the amount of money that the factoring company holds back from the advance to cover any potential losses.
5. Monthly Minimums: Some factoring companies may require a minimum monthly volume of invoices to be factored.

It’s essential to carefully review the costs and fees associated with invoice factoring before signing an agreement with a factoring company. Understanding these costs will help you make an informed decision and ensure that invoice factoring is a cost-effective solution for your business.

Will factoring invoices look bad to my customers?

The short answer is no. Accounts receivable factoring has been around for centuries and is a perfectly viable and acceptable method of helping increase your business’s cash flow. In fact, working with a factoring company means the factor thought your business was solid and not a lending risk. Also, working with a factoring company can actually be better for the customers as they now have a bit more time to pay their invoices, while you as the business owner won’t have to wait for that inflow of cash for services rendered or goods delivered.

Managing accounts receivables through factoring can improve cash flow and customer relations by providing working capital and ensuring timely payments.

Another thing to remember is that invoice factoring is not money that you borrow and have to pay back, like a bank loan. It is money that you have already earned by delivering a product or service, you are just receiving it at a faster rate to better serve your customers.

What if my customer doesn’t pay their bill?

There are two types of factoring services: recourse factoring and non-recourse factoring. Higher fees accompany non-recourse factoring, but with this type of factoring, the factor will assume the risk if the customer doesn’t pay. In non-recourse factoring, the factoring company takes on the full liability of unpaid invoices, which often results in higher fees due to the additional risk involved. Recourse factoring is less expensive, but businesses are required to buy the invoice back if it goes uncollected for a fixed number of days outlined in your factoring agreement.

Recourse and Non-Recourse Factoring Options

When considering invoice factoring, businesses have two main options: recourse and non-recourse factoring.

1. Recourse Factoring: In this type of factoring, the business is responsible for paying back the factoring company if the customer does not pay the invoice. This type of factoring is typically less expensive, but it carries more risk for the business.
2. Non-Recourse Factoring: In this type of factoring, the factoring company assumes the risk of non-payment by the customer. This type of factoring is typically more expensive, but it provides more protection for the business.

When choosing between recourse and non-recourse factoring, businesses should consider their risk tolerance, cash flow needs, and the creditworthiness of their customers. Each option has its advantages and disadvantages, so it’s important to choose the one that best aligns with your business’s financial strategy.

Do I have to sell all of our invoices to the factoring company?

Accounts receivable factoring gives you the control. You can factor as many or little invoices that you want. You can also choose which specific clients to factor. It’s entirely up to you. You may also use the factored money that you receive for any business expense you choose.

Asset-based lending, which includes invoice factoring, offers a flexible financing option by leveraging your assets.

How often can I factor invoices?

If you have unpaid invoices and want to factor them, a factor can fund you on your timeline. There may be months you need to factor lots of invoices and months where you don’t need to factor at all. That’s ok. Factoring is a type of business funding that grows with your company. You can start the process by getting a free quote!

If my credit history isn’t great, will that affect my ability to factor?

Because your customers are responsible for paying the outstanding bills, we look at your customers’ credit-worthiness when deciding if your company is a worthwhile risk. Your personal or business credit history really has no effect on whether or not your business qualifies for invoice factoring.

How long does the invoice factoring process take?

For first time applicants, approval usually takes 3-5 days, with a cash turnaround of 24 hours or less. While your business receives most of the cash value for your invoices upfront, the time it takes to receive the remainder relies on how long it takes your customers to pay their bill to the factor. After your customers pay, the rest of the discount is returned to you, minus a factoring fee.

What types of industries can use invoice factoring?

We work with several different industries. Almost every business-to-business company can be factored. To name a few: trucking companies, healthcare companies, construction companies, oil and gas companies, manufacturing companies, staffing companies, clothing and textile companies. Don’t see yours listed? Don’t worry–we’ll find someone to do it. Call us anyways!

Choosing the Right Invoice Factoring Companies

Choosing the right invoice factoring company is crucial for businesses that want to improve their cash flow and reduce the risk of bad debt. Here are some factors to consider:

1. Experience: Look for a factoring company with experience in your industry.
2. Reputation: Check the factoring company’s reputation online and ask for references.
3. Fees: Compare the fees and costs associated with different factoring companies.
4. Advance Rates: Consider the advance rates offered by different factoring companies.
5. Customer Service: Look for a factoring company with excellent customer service and support.
6. Flexibility: Consider a factoring company that offers flexible terms and conditions.

By carefully evaluating these factors, businesses can choose the right invoice factoring company to meet their cash flow needs and improve their financial stability. The right partner will not only provide the necessary funds but also support your business’s growth and success.

What will Factor Finders do for me?

Factor Finders will partner you with the best invoice factoring company in your industry to get you funded. Don’t waste your time with tedious searching for a factoring company when you have a steady business to run. We have a nation-wide network of funding professionals readily available for you. There are no additional fees needed to be paid to us. We will cater to your business and make sure that you get all the assistance needed to quickly access the capital you need to grow your business.

Factor Finders provides a comprehensive factoring faq to help businesses understand the process. Additionally, receivable financing is a key service offered by Factor Finders.