The Complete Guide to

Invoice Factoring &
Accounts Receivable Financing

Invoice factoring is a financial service that helps small businesses improve their cash flow. Factoring companies provide this special form of asset-based lending so that businesses avoid the pitfalls from having to extend trade credit terms of 30 days or more to customers.

Is invoice financing right for me?

Often, businesses don’t qualify for bank financing or don’t have time to get a bank loan. Common reasons for not using bank financing include

  • You don’t have 2 to 3 years history of profitability.
  • You don’t meet all the requirements for a bank loan.
  • You simply can’t wait 2 or 3 months for a bank loan approval.

If you ‘re having heart problems, you need a doctor. It’s no different when your business is suffering from cash flow problems. Cash shortages create all sorts of problems including missed payrolls, upset vendors and potential bankruptcy. When you need cash, you’ve got to get it and get it quickly.

Consider the following

Invoice financing can be as effective as bank financing, sometimes even better. Here are some things to consider when determining if invoice financing is right for you.

Invoice financing moves working capital from accounts receivable to cash so you can better operate your business.
Invoice financing operates much like a traditional line of credit as long as you spend the funds on operating expenses; not equipment, long-term debt or family vacations.
Very simply, invoice financing makes sense if it helps you generate more revenue than it costs or if it keeps your business from suffering due to cash flow issues.

Accounts receivable factoring
Step by Step

The accounts receivable factoring process begins with the completion of selling your product or service to the final step of receiving your final payment.

  1. Complete your services for your customer.
  2. Send your invoice to the factoring company.
  3. The factoring company verifies the invoice is correct and valid.
  4. The factoring company funds your bank account.
  5. The factoring company forwards the invoice to your customer.
  6. The factoring company collects the receivable from your customer.
  7. The factoring company sends you the reserve as final payment.

The entire process is repeated for each invoice or batch of invoices that you factor. At any time, you can request reports that show your outstanding invoices, paid invoices, and past-due invoices.

Invoice factoring is great for cash flow.

If you send the invoice directly to your customer, then you’ll send a copy of the invoice to your factoring company.

Factoring companies typically fund your bank account within 24 to 48 hours of verifying your invoices. The amount funded is the invoice amount less the reserve which is determined by the advance rate.

Factoring companies deduct their factoring fees from the funds sent to your bank account or from the final payment.

Some factoring companies require you factor all your invoices. Many factoring companies allow you to select only the customers or invoices that you want to factor, giving you more flexibility and control.

“If you got paid for sales the instant you made them, you would never have a cash flow problem.”

Invoice financing benefits

The biggest advantage of accounts receivable financing is improved cash flow, but there are many other benefits to factoring services.

Improved Cash Flow

Accounts receivable financing improves your cash flow because you don’t have to wait 30, 45 or 60+ days to collect your receivables. You get the cash quicker so you can pay for supplies, payroll and other operating expenses.

No Loans or Debt

One of the best features of receivables financing is it doesn’t involve debt or loan payments. Invoice factoring allows you to manage your cash flow without incurring risky debt.

Peace of Mind

Nothing compares to having stable cash flow for your business. Receivables factoring provides you confidence and assurance so that you can focus on more important matters.

Receivables Management

Factoring companies handle your accounts receivable management such as billing, collections and reporting. Factoring your receivables can often pay for itself in man-hours saved if you performed these in-house.

Business Credit Services

Factoring companies analyze your customers’ credit risk as well as credit limits so you don’t get over-extended with a customer which protects you from bad debt losses.

Quick and Easy

Many factoring companies can approve your factoring application within several business days. Often, you can get your first funding within 5 to 10 days. Invoice factoring is usually a quick and easy process.

Invoice factoring rates

Flat rates are good for controlling your costs when your collection days are relatively high. Adjustable rates are best when your collection days are low.
Use our factoring calculator to calculate your cost.

Compare the following costs with an invoice amount of $100,000 and collections days of 60 days.

Rate TypeRateCostBest used for
Flat Rate4.5% flat rate$4,500Flat rates are best used when your collections days are high.
Adjustable rate (not pro-rated)0.7% per week$6,300Adjustable rates are best used when your collections days are low.
Adjustable rate (pro-rated daily)0.7% per week$6,000Pro-rated rates are the best type of adjustable rates because you only pay for actual collection days.

Evaluating factoring rates

Invoice factoring rates depend on several criteria such as sales volume, industry risk, and AR days outstanding. Rates can vary anywhere from 1% to 6% depending on the particular situation for your business.

Sales Volume

Invoice factoring rates vary according to your monthly factored sales volume. Factoring sales of $500,000 per month is much less expensive than factoring sales of $50,000 per month.

Industry Risk

Some industries involve more risk or complexity. Industries such as construction and healthcare usually cost more than industries like staffing, trucking or manufacturing.

Customer Credit

Sometimes your customer base will affect your factoring rates. Large, stable companies pose less risk than smaller companies, so that good customers may result in lower factoring rates.

Collection Days

Your receivables’ collection days has a big impact on your factoring costs. Because factoring rates are usually based on the outstanding days of your receivables, higher collection days results in higher costs.

Factoring service agreement

Become familiar with the application process before signing a factoring agreement. Most agreements are similar but they are legal documents. If you’re not comfortable with the language then consult an attorney.
Step 1

Completing the application

A typical factoring application requires a list of your customers, an accounts receivables aging, and sometimes financial statements. You’ll also provide the factoring company with personal and business information.

Step 2

Evaluating your risk

Factoring companies must evaluate the risk of factoring your receivables. They analyze your customers’ credit as well as your business situation. If they determine the risk is too high, then you may not get approved.

Step 3

Signing the agreement

You’ll sign the factoring agreement as well as other required documents such as a personal guarantee. The agreement or contract terms include the contract period, factoring rates, cancellation fees and other terms.

Step 4

Filing a UCC-1 statement

Your factoring company will file a UCC-1 financing statement to give notice that it has an interest in your accounts receivables, and possibly other business assets.

Choosing a factoring company

Never settle for the first factoring company you see in a Google search. Do your homework before selecting a factoring company. FactoringClub is your complete resource with information on over 100 factoring companies.

No. 1

Search your industry

You must find a factoring company that provides factoring services in your industry. Even though invoice factoring is fairly standard, some industries require factoring expertise such as construction, healthcare and trucking.

No. 2

Evaluate the company representative

When talking to the company sales person or representative, gauge his or her attitude, helpfulness and transparency. Ask these questions after speaking on the phone or in person:

Is the person genuinely interested in you and your business?
Does he or she answer your questions knowledgeably and clearly?
Does the person respond to you in a transparent and timely manner?

During your initial conversation or visit, determine if the factoring company shares your values and has your best interest in mind. You want someone who is friendly, knowledgeable and responsive to your needs.

No. 3

Get a cost estimate

A factoring company should give you an idea of your factoring costs based on your sales volume, collection days and customers. Determine how they calculate your costs. Do they use a flat rate or an adjustable rate?

No. 4

Ask for the contract terms

Ask the sales person or representative about these terms or conditions:

  • Application or start-up fees.
  • Additional fees such as processing or handling fees, and credit check fees
  • Monthly minimum fees if you don’t meet a monthly sales amount.
  • Contract length, cancellation notice and cancellation fees.

Get as much information as possible up front, so you don’t waste your time later.  If necessary, obtain the services of a qualified factoring broker. Call FactoringClub for help at 866-748-7111. We offer free broker and consulting services.

Do you want a local factoring service?

You may not care where your factoring company is located. You just want an affordable rate and good service. With today’s technology, most factoring companies can operate from a distance without any problem. If you want a local factoring company, then use the search form below.

Find your factoring company!

Featured Factoring Companies

Tetra Capital is a Salt Lake City factoring company that provides quick and easy freight factoring services with no long-term contracts or hidden fees.
801-676-0182
6995 Union Park Center, Midvale, UT
6995 Union Park Center, Midvale, UT
Infusion Funding is a New Jersey factoring company that provides accounts receivable factoring for small to medium-size businesses.
201-540-9210
60 Crescent Bend, Allendale, NJ
60 Crescent Bend, Allendale, NJ
Aladdin Financial is a South Dakota freight factoring company that has big roots in the trucking industry and offers competitive rates.
605-951-9009
1201 W. Russell St., Sioux Falls, SD
1201 W. Russell St., Sioux Falls, SD