Invoice factoring is a popular form of alternative financing for business owners, but some aspects of factoring can be confusing. We’ve compiled our most frequently asked questions about invoice factoring on this page. If you can’t find an answer here, feel free to contact us to clear up any confusion you might have about working with a factoring company.
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What is invoice factoring?
Invoice factoring, also known as accounts receivable financing, is an alternative funding option for small business owners. By financing your accounts receivable, you have fast access to working capital that you can use to build your business.
Is accounts receivable factoring a loan?
Factoring financing is not a loan – rather, it is a way for you to turn existing accounts receivable into cash. The factor actually purchases your receivables at a discount, so there is no interest to repay and no new debt on your balance sheet.
How does invoice factoring work?
The factoring process is pretty straightforward:
- Submit unpaid invoices for work completed
- The factoring company verifies invoices and advances you the funds (up to 95% of the invoice amount) within 24 hours
- The factoring company collects payment from your customer according to your payment terms
- When payment is received, the factor releases the remainder of the invoice amount, minus a small factoring fee
There are some factoring terms I don’t understand. What do they mean?
Certain terms are used in the factoring world that aren’t as common in other industries. Check out our common factoring terms page to learn the lingo!
What types of businesses use invoice factoring?
Businesses that are selling goods or services to other businesses can use invoice factoring to gain necessary working capital. Factoring companies can help businesses of all sizes in almost any industry. Industries include staffing, transportation, manufacturing, distribution, information technology and many others. Learn more about the industries we serve.
How long do I have to be in business to qualify for factoring?
You don’t need to be in business long – we can find factoring for start-ups. If you have an invoice, we can help get you funded. Even if you don’t have an invoice yet but you just secured a new contract, we can get you set up.
How do I start factoring?
All you have to do is give us a call or fill out an online form!
What do I need to start the factoring process?
To start, you’ll need a completed application, accounts receivable aging report, Articles of Incorporation, a list of your customers and the invoices you want to factor. Learn more about how to get started with factoring.
What types of invoices are eligible for factoring?
Factoring provides funding for both new invoices and outstanding invoices. Eligible invoices are:
- Current – Not overdue according to your company terms
- Payable by another business – Invoice factoring is not an option for consumer-pay invoices.
- Unpledged – No other company can have a claim to the invoice.
How long does the approval process take?
With the necessary documents, an invoice factoring company can set up your account in as little as 1 to 3 business days for most industries.
How quickly will I receive funding?
Once an invoice is submitted for factoring, you’ll typically receive funding within hours.
How much does factoring receivables cost?
Factoring fees vary by industry and volume. Please contact us so we can get you a quote for your business.
What is the typical factoring advance rate?
Advances on invoices will vary by industry and volume. Factoring advances can be anywhere from 80% – 95% for most industries. Check out our page on factoring rates unless you’re in the transportation industry. If you are, then please see our freight factoring page for information on freight factoring rates.
Am I required to factor every invoice?
No. We understand that some customers pay faster than others. You have the ability to choose which clients to factor when you need to factor.
Will I be locked into a long-term contract?
No. Many factoring contracts only require a 30-day notice to end.
How will the money be sent to me?
Advances are completed by a bank transfer to your account on file, either by wire (same-day) or ACH (next-day).
Is there a monthly minimum required?
Nope. You will not have to meet a monthly minimum volume to work with a factoring company.
Is there a limit to how much funding I can receive?
There are no maximum amounts to funding. Factoring grows with your business. If you have the invoices, funds are available.
What are the benefits of factoring?
Many businesses choose to factor over traditional lending because it’s easy, flexible and fast. No additional debt is added to your balance sheet and it provides relief from slow-paying clients. See more benefits of factoring.
What is the difference between recourse and non-recourse factoring?
There are two different types of factoring programs – recourse and non-recourse. With recourse, your business must buy back receivables that the factoring company is unable to collect payment. In a non-recourse factoring agreement, the factoring company takes the risk of non-payment by your clients. Because of the added risk, non-recourse factoring fees are slightly higher.
Will I qualify for accounts receivable factoring if I have less than perfect credit?
Yes! Invoice factoring companies base their funding decisions on your customer’s credit rating and payment history, so even if you have had problems in the past you can rebuild with invoice factoring. Learn more about factoring with less-than-perfect credit.
Will I be eligible for accounts receivable factoring if my company owes back taxes?
Tax issues are assessed on a case-by-case basis. This information should be provided immediately in order to negotiate a lien subordination with the tax entity. Another possibility includes requesting a payoff and using the initial funding to pay the tax entity.
Can my company apply for accounts receivable factoring if we are considering bankruptcy?
Yes. Factors will consider Chapter 11 bankruptcy.
What will my customers think?
If an account debtor (your customer) receives notice of your factoring and questions the process, simply explain that you have selected a company to manage and finance your accounts receivables. It’s likely your customers are familiar with factoring and many of them may already work with factoring companies. Factoring invoices shouldn’t impact relationships with your customers. The factor may reach out to confirm details from time to time, but communication will be professional and courteous.