Invoice Factoring

Complete Guide to How Factoring Works

What is invoice factoring?

Invoice factoring, or invoice financing, is a financial arrangement where a business sells its invoices to a third party (called a factoring company) at a discount. The business can then access funds immediately, rather than waiting for customers to pay their invoices. This provides a quick solution to cash flow problems caused by trade credit terms.

Invoice factoring, or invoice financing, is not a loan; rather it is the sale of assets (invoices or accounts receivables) for cash. Invoice factoring is an attractive option for businesses that need cash quickly, or for those that don’t qualify for traditional bank loans.

Is invoice factoring 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:

Reason 1

You don't have 2 to 3 years history of profitability.

Reason 2

You don't meet all the requirements for a bank loan.

Reason 3

You simply can't wait 2 or 3 months for a bank loan approval.

Invoice factoring guide

Consider the following

Invoice factoring 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 factoring moves working capital from accounts receivable to cash so you can better operate your business.

Invoice factoring 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 factoring 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.

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

Entrepreneur.com

Invoice financing benefits

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

Cash Flow

Invoice 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.

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.

No debt

One of the best features of invoice 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. Invoice financing provides you confidence and assurance so that you can focus on more important matters.

Receivables accounting

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

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 financing is usually a quick and easy process.

Invoice factoring...step by step

The invoice factoring process begins with the completion of selling your product or service and concludes with receiving your 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.

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.

STEP 1

Send your invoice to the factoring company.

STEP 2

The factoring company verifies the invoice is correct and valid.

Step 3

The factoring company funds your bank account.

Step 4

The factoring company forwards the invoice to your customer.

Step 5

The factoring company collects the receivable from your customer.

Step 6

The factoring company sends you the reserve as final payment.

Invoice factoring guide

Invoice 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. Higher volumes usually lower your rates.

Collection days

Your A/R collection days can have a big impact on your factoring costs, especially when you are charged an adjustable rate.

Customer credit

Your customers' credit ratings may affect your factoring rates. Creditworthy customers usually lower your rates.

Industry risk

Some industries involve more risk or complexity. Construction and international receivables usually increase your rates.

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.

Complete 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.

Sign 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.

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.

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.

Invoice factoring guide

Choosing a factoring company

Choosing the right factoring company is a pivotal decision that directly impacts your business’s financial health. It involves careful consideration of factors such as fee structures, creditworthiness assessments, contract terms, and industry specialization.

Look at factoring companies in your industry. Many industries such as business services, staffing or manufacturing are commonly served, but some niche industries require a certain expertise or specialty. Niche industries include foreign receivables, construction, healthcare and trucking.

Decide if you want a factoring company in your city or state. FactoringClub has a complete directory of factoring companies and where they’re located. You may want to sacrifice location for a company that is strongly recommended or recognized as a leader in the industry.​

  • Do they charge an application or startup fee?
  • How long is their contract… 30 days, one year, 2 years?
  • Do I have to factor all my invoices?
  • Do they charge a monthly minimum fee?

When talking to the company salesperson, pay careful attention to his or her attitude. Are they genuinely interested in my business? Do they understand my needs? Is the person attentive, knowledgeable and responsive.

Get an idea or ballpark of your factoring costs based on your monthly sales volume and receivable days outstanding. How do they calculate my fees… do they use a flat rate or an adjustable rate? How does the factoring rate impact my costs if my collection days run longer than expected.​

Read more about Invoice Factoring in our Blog

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What is a Factoring Company A factoring company, also known as a ‘factor’, is a third-party firm that businesses can use to manage their accounts receivable....

We will explore the key criteria to consider when comparing factoring services; the different types of factoring services available; and how to choose the right factoring...

Let us find the right factoring company for your business, among 135 network partners

AeroFund is a Santa Clara, CA factoring company.

AeroFund Financial

San Jose California

Business Services Manufacturing Oil and Gas Staffing Trucking

Steve Troy

CEO

Working Capital of America is an Illinois factoring company.

Working Capital of America

Naperville Illinois

Construction

Alex Tovstanovsky

VP Small Business Lending

BayView Funding is a San Jose, CA factoring company.

Bay View Funding

Santa Clara California

Business Services Manufacturing Oil and Gas Staffing Trucking

Seth Herman

SVP, National Sales Manager

Hamilton Group is a New York factoring company.

Hamilton Group

North Syracuse New York

Business Services Manufacturing Oil and Gas Staffing

Robert Kort

Chief Marketing Officer

Triumph Financial is a Dallas, TX factoring company.

Triumph Financial

Coppell Texas

Trucking

Jason Mullican

VP Channel Marketing

Trucking Partners is a Birmingham, AL factoring company.

Trucking Partners Financial

Cullman Alabama

Trucking

Dwayne Hood

President