Authored by Phil Cohen
As you close out 2024, it’s a good time to revisit the basics of factoring, and how it can serve your company in the new year. Whether you’re new to factoring or it’s just time for a refresher, our updated Factoring 101 guide covers what factoring is, how it works, and what you need to know heading into 2025.
If you’ve been searching for a way to improve your company’s cash flow, this factoring guide will walk you through the essentials of factoring for beginners.
What Is Factoring?
Factoring is a business solution that may sound more complicated than it really is. In exchange for a cash advance up front, your business sells its unpaid invoices to a factoring company. Your customers still have their usual 30-, 60-, or 90-day payment terms, but you get the cash flow you need to grow your business, without waiting. Factoring helps bridge the gap between when you invoice the client and when you receive payment.
Here’s how it works:
- You deliver goods or services to your customer and issue an invoice.
- You sell that invoice to a factoring company at a discounted rate.
- The factoring company advances you a percentage of the invoice’s value (up to 90%).
- Once your customer pays, the factoring company sends you the remaining balance, minus their fee.
Why Businesses Use Factoring in 2024
While factoring is nothing new, businesses are increasingly turning to it as a solution for their cash flow challenges. The high interest rates we’ve seen in 2024 are just beginning to come down, but they are still a deterrent against debt.
Meanwhile, economic uncertainty has resulted in increased operational costs, ongoing supply chain concerns, and a lopsided labor market. For small and medium-sized businesses especially, that can cause major cash flow problems. Factoring helps smooth out those gaps to keep your business moving forward.
Types of Businesses That Benefit from Factoring
Factoring isn’t the right solution for every business, but it offers the right kind of flexibility for those that operate on extended payment terms or that have a lot of their capital tied up in equipment or facilities.
A few examples of the kinds of businesses that commonly use factoring include:
- Staffing Agencies: Factoring helps staffing companies ensure they can always pay their workers on time, no matter their customer payment terms.
- Transportation: Freight and trucking companies use factoring to cover expenses while waiting for customers to pay their invoices.
- Manufacturing: Manufacturers often face long payment cycles that can be a roadblock to growth. Factoring provides them with the working capital they need to scale.
- Oil and Gas: Companies in oilfields often deal with limited capital while waiting for payment, reducing their ability to go after new projects. Factoring eliminates that funding gap for these businesses.
- Construction: Contractors use factoring to get paid now without waiting months for a project to end.
How to Get Started with Factoring
When your company decides to add factoring to its suite of business solutions, getting started is relatively straightforward. Here’s what we recommend to companies that are new to factoring and figuring out how it fits into their business model.
Evaluate your needs: What are your cash flow problems and challenges? Do your customers pay on time, or do you struggle with chasing late invoices? Maybe your customers love your flexible payment terms, but you’re finding it difficult to bridge the gap between when you invoice and when you get paid. Identifying your biggest challenges will help you determine what kind of company will suit you best.
Find a reputable factoring company: The best factoring company for a particular business depends on many factors (no pun intended). The size of your business, your cash flow pain points, and even the industry you operate in can affect whether a factoring company will fit well. And choosing a factoring company that doesn’t gel well with your company could add to your headaches, not remove them.
Consider a factoring broker: Factoring brokers connect you with the best factoring companies for your business. They’ll discuss your business’s needs and goals, then match you with the right factoring company. At Factor Finders, our network of partners includes specialists in a range of industries, including staffing, transportation, healthcare, oil and gas, and more, so you’ll be connected with someone who truly understands your business.
Submit your invoices: Once you’ve chosen a factoring partner, submit your unpaid invoices. The factoring company will verify them and advance you the cash—usually within 24 hours.
Get paid: You’ll receive the majority of your invoice value right away. When your customer pays the invoice, you’ll receive the remaining balance minus the factoring company’s fee.
How Much Does Factoring Cost?
Another key point for businesses – especially those struggling with cash flow – is the ROI of factoring. They want to know how much it costs, and whether immediate access to working capital is worth it.
The good news is that factoring can be an affordable way to manage your cash flow and often costs much less than using debt to achieve the same purpose. The average cost for invoice factoring in 2024 is often between 1.5 and 2.5% of the invoice value monthly, although the price varies by company. Compared to 2024 interest rates, factoring can be much less expensive and doesn’t add debt to your balance sheet.
Invoice Factoring Example
To understand factoring better, let’s use an example. Suppose you have $20,000 in invoices you’d like to factor to gain quicker access to cash.
- You sell those invoices to a factoring company, which advances you a portion of the value: let’s say 80%, which is $16,000.
- You can use that money to buy inventory, make payroll, whatever it is your business needs now.
- The factoring company takes over the responsibility of collecting repayment, in exchange for a 1.5-2.5% fee for each month it takes the customer to pay.
- If the customer pays in 30 days, your fee is $400 (20,000 x 0.02).
- The factoring company then sends you the remainder of your invoice value less the fee; in this case, you get $3,600 after the customer has paid.
- All told, you have paid a monthly fee of $400 and received $19,600 of your $20,000 in invoices.
With factoring, there’s no interest and no collateral, and you get the full value of your invoices minus the factoring company’s fee. Keep in mind that fees vary from company to company, and can increase the longer it takes your customers to pay.
Working with a Factoring Broker
Some companies do the legwork of finding a factoring company on their own, spending time researching and vetting companies to find the ones who understand their industry. While that level of control may sound appealing, the truth is that it uses valuable resources that can be better spent on running or expanding the business.
Working with a factoring broker streamlines the process of getting started with factoring. At Factor Finders, we specialize in finding the best factoring company for your needs.
We have access to a wide network of trusted factoring companies which allows us to find the perfect match for your business. And we respond to you fast – sometimes within minutes, so you never have to wait once you’ve made your decision to begin factoring your invoices.
The Bottom Line
As you close out 2024 and prepare for the new year, now is the perfect time to consider whether factoring is the right solution for your business. Having access to fast, reliable funding can make all the difference in keeping your operations running smoothly and setting the stage for growth in 2025.
As a factoring broker, Factor Finders matches you with the best factoring companies in your industry, ensuring you get a tailored solution that fits. Contact us to connect with the right factoring company for you.