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Everything to Know About Invoice Factoring

Invoice Factoring 101

So, you’ve heard about invoice factoring but aren’t sure how it works or how it could help your business? Then, you’ve come to the right place. Invoice factoring is one of the most efficient ways to increase cash flow for your business. Oh, and you won’t create any unwanted debt.

What is Invoice Factoring?

Invoice factoring is a business-friendly alternative to traditional finance methods that gives your company fast access to the working capital you need, without any strings attached or any debt to repay. Simply put, your business sells its unpaid invoices to a factoring company.

Invoice factoring is also known as accounts receivable factoring or A/R financing.

How Does Invoice Factoring Work?

Invoice factoring converts your open invoices into immediate cash, saving you from waiting 60 to 90 days or more for payment from your customers. In addition, you have the flexibility to factor whichever and however many invoices you need to have cash on hand. The process is simple:

  1. Once you set up your account with the right factoring company, you can begin to submit copies of your unpaid invoices to the invoice factoring company. Your work must be completed and delivered to begin factoring invoices. Continue to invoice your customers as usual and email or fax a copy directly to the factor.
  2. The factor will verify your invoices and deposit as much as 95 percent of the invoice amount directly into your bank account within 24 hours. For the transportation industry, advances can be as high as 98%.
  3. Continue work per usual while the factoring company collects from your clients. Your factor will engage in active collection efforts, allowing you more time to serve your customers and focus on the big stuff: growing your business.
  4. Repeat the process as many times as you want, with as many different clients as you want. Whether you want to factor one particularly slow-paying client or all of them, the choice is totally up to you!

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Invoice Factoring and Small Businesses


Invoice factoring has a long history that dates back to the 1300s and 1400s when traders would provide loans against the delivery of trade goods. Instead of trading the actual goods, merchants would trade contracts associated with these goods.

This practice continued as English colonists traveled to America in the 1600s and 1700s, where funds were advanced by London to purchase goods. In the 1910s, the garment industry relied on invoice factoring to obtain funds for purchasing raw materials and manufacturing textiles.

Over time, advancements in technology, particularly Internet access, and other technological developments have made invoice factoring increasingly easier and accessible for small businesses. As a result, a more recent development called invoice financing, which is also known as accounts receivable financing, has emerged. Invoice financing is similar to invoice factoring as it provides funds based on outstanding invoices.


Invoice factoring has gained popularity among business owners, particularly small and medium-sized enterprises (SMBs), due to its ability to provide faster cash flow. SMBs often find themselves in need of immediate funds to sustain their operations and facilitate growth.

For a new business, waiting for payments to come through before expanding into new market opportunities may not be a viable option. Additionally, smaller companies in their early stages commonly encounter unexpected expenses and events that exceed their budgeted costs.

By opting for invoice factoring, business owners can save valuable time and capitalize on unforeseen opportunities that require immediate access to cash. Rather than waiting for customers to settle their invoices, invoice factoring allows businesses to receive a percentage of the invoice amount upfront, enabling them to meet financial obligations promptly and seize time-sensitive prospects for growth.

This flexibility and responsiveness make invoice factoring an attractive option for business owners seeking immediate liquidity to navigate through fluctuating market conditions and capitalize on emerging opportunities.

Invoice Financing vs. Invoice Factoring

Invoice financing can be a preferable option to invoice factoring in certain circumstances. One such scenario is when the primary objective is to accelerate payment collection without relinquishing control over customer relationships and experience. By opting for invoice financing, businesses can maintain a direct line of communication with their clients and ensure that they have a say in shaping the customer experience.

Another reason why invoice financing may be chosen over factoring is the higher level of transparency it offers in terms of fees and repayment policies. This transparency minimizes the chances of unexpected costs or hidden charges, enabling businesses to make more accurate predictions of future expenses. Consequently, invoice financing provides a clearer picture of the financial obligations associated with the financing arrangement.

Invoice financing can prove to be a valuable tool, especially for growing companies that prioritize having control over their cash flow. It allows businesses to access funds quickly while retaining a certain level of autonomy and decision-making power. This aspect makes invoice financing an attractive alternative when compared to invoice factoring, particularly for enterprises seeking to manage their financial resources with more flexibility and precision.

What are the Benefits of Factoring Invoices?

When you begin invoice factoring, you are taking control of your cash flow. But more importantly, you are starting a relationship with your factor that can help your business in many ways:

Credit and background verification: It is critical to work with reliable customers to build a solid payment history and turn your sales into revenues. However, credit and background checks are expensive to run and can quickly eat away your working capital. Your invoice factoring company will provide these checks at no additional charge to you, so you can be confident in your customers’ quality and address any issues before they affect your business.

Credit-building and repair: You can qualify for a competitive invoice factoring program even if your business credit is less than stellar. In addition, by factoring your open invoices, you can cover your daily operating costs and pay down current debt to rebuild your credit rating. Startups qualify as well, so when your business is brand-spankin’ new, factoring can help you hit the ground running for long-term success.

Money-saving opportunities: Competitive rates are not the only way invoice factoring can save your company money. By negotiating early-pay discounts or other payment incentives with your suppliers, you can put your rejuvenated cash flow to good use. Depending on how much you factor, you may even qualify for a volume discount that will reduce your rates further.

Consistent and steady cash-flow: Ups-and-downs are only good for one thing: rollercoasters. Factoring your invoices can help you regain complete control of your working capital. Whether your business is subject to seasonal fluctuations or you are just tired of waiting 30, 60 or even 90 days for your money, invoice factoring can help you regulate cash flow.

Ability to Grow: Your business might be steady, but invoice factoring can allow for growth in lots of different ways:

  • Increased marketing efforts
  • Better contracts with larger clients
  • Technology upgrades or investments
  • New hires or training programs for existing employees
  • Site expansion or re-location

No Added Debt: Unlike a traditional loan, invoice factoring won’t add more debt to your balance sheet. Quite the opposite actually: factoring can help you get the extra cash you need to pay off old debts. There’s no added interest or money to pay back. There’s no added interest or money to pay back. It’s already your money, factoring just helps you get it in your bank account faster.

What Types of Businesses Use Factoring?

Industry familiarity refers to the knowledge and experience a factoring company has in a specific industry. When selecting a factoring company, it is crucial to consider their expertise and familiarity with the industry your business operates in.

Choosing a factoring company with industry familiarity can greatly impact your decision-making process. An important aspect to consider is that different industries have unique characteristics, requirements, and challenges. By selecting a factoring company that specializes in financing within your industry, you can benefit from their understanding of industry-specific factors.

How Do I Start Factoring? What Do I Need?

The initial paperwork to start the invoice factoring process is relatively easy to obtain and complete:

  • A short application, sent over by the factoring company
  • Articles of Incorporation
  • Copies of invoices you’d like to factor
  • Customer list

Once you send in the required documentation, most invoice factoring companies can approve you for funding in as little as 24 hours. Businesses of all sizes are generally eligible, regardless of their financial or credit situations, because the factoring company will base its funding decisions on your customers’ creditworthiness.

If you have a less than perfect personal credit score, you can still qualify for invoice factoring. Because your clients are ultimately responsible for paying the bill, most factors are more concerned about your customer’s credit, not yours.

Common Invoice Factoring Terms

Don’t get confused or discouraged because you don’t speak the language. Let us help you translate:

  • Account Debtor: Your customers
  • Accounts Receivable Aging Report: A report showing the amount of unpaid receivables as well as the length of time they have remained unpaid
  • Accounts Receivable Factoring: AKA invoice factoring. These two terms mean the exact same thing and are used interchangeably
  • Discount Rate: A percentage of the invoice charged as a fee by the factor for advancing funds
  • Due Diligence: The background research conducted by the factor to assess potential customers
  • Factoring Advance Rate: A percentage of the invoice advanced to the client within 24-hours. usually between 80-95% of the total invoice amount
  • Factoring Broker: a third-party who connects business owners with an appropriate factoring company to meet the small business’s needs and goals
  • Lien: Assigns the right to claim possession of property until a debt is paid back
  • Non-Recourse Funding: Sometimes customers don’t pay their invoices within the agreed-upon payment terms…or worse, they never pay their invoice! With non-recourse funding, the factor would assume all responsibility for lost funds. Because of the apparent risk, non-recourse factoring is more expensive
  • Recourse Funding: If your client does not pay within the agreed-upon payment terms, your company must buy back the receivables
  • Reserve: The amount of the account receivable held back by the factor until full repayment by the customer
  • Spot Factoring: A one-time agreement that gives staffing companies the ability to factor a single invoice

What to Look for in a Factoring Company

There are many factoring companies out there, but they all have different specialties, fee structures, locations, and more. Consider these points when comparing options:


There’s no such thing as a free lunch, and that’s true for factoring as well. Make sure you understand the overall cost to factor, including all fees your factor may charge. These can include application costs, account setup fees, costs to research any liens, credit reports, charges for money transfers, or last-minute funding. It’s important to go with a factor you feel entirely comfortable with and can trust. Not all factors charge for the same things or have hidden fees.


We can’t stress this one enough! First, make sure you read the fine print of your contract. There’s nothing worse than starting to factor with a company only to realize you are locked into terms you do not like. These terms may include a limit on how much you can factor per month or chain you to a specific factoring company for the rest of your life. Long-term contracts DO exist and if you try to get out of them, be prepared to fork over big bucks. Make sure you’re crystal clear about how long you’re signing up for, how much you can factor per month, and which of your clients are eligible for factoring.


Is there anything worse than a business with bad communication? Yes, a business with lousy communication that also handles your money! When it comes to your business and money, you want someone that isn’t going to take two days to respond to your email or inquiry. Of course, every factor will say they have great customer service and communication but pay attention to how and when your potential factoring companies respond. Would you want them responding in such a way to your customers? If the answer is no, move along. There are plenty of fish in the factoring sea!

Industry Expertise

If you broke your arm, you wouldn’t see an eye doctor, so why would you do the same thing with your factoring company? Yes, there are good companies that do general factoring, but try to find one in your niche. There are many factoring companies specializing in specific industries, which means they’ll understand a lot about your business model from the get-go. Additionally, they may offer programs specific to your industry, such as back-office support or fuel cards, which may be especially beneficial or an added bonus to deciding to factor!

Should businesses sell their invoices to a factoring company?

Businesses should consider selling their invoices as a financing option. Instead of opting for a traditional term loan, they can choose to work with a factoring company that purchases their unpaid invoices. By selling an invoice, the business receives a percentage of the total invoice value upfront, while the factoring company collects the remaining amount from the customer.

One advantage of selling invoices is the immediate access to funds. Instead of waiting for customers to pay, businesses can receive a portion of the invoice value quickly, helping to improve cash flow and meet immediate financial obligations. This can be particularly beneficial for businesses with long payment cycles or those experiencing temporary cash shortages.

Furthermore, selling invoices transfers the responsibility of collecting payments from the business to the factoring company. The factoring company takes on the risk of delayed or non-payment, eliminating the need for the business to chase after customers for payment. This can free up valuable time and resources that the business can allocate towards other important tasks, such as expanding operations or focusing on core business activities.

However, it is crucial for businesses to consider the impact on their customer relationships when selling invoices. Once an invoice is sold, the factoring company becomes the main point of contact for payment and inquiries regarding the invoice. This shift in responsibility may affect the dynamics between the business and its customers, as the factoring company becomes the intermediary in the payment process.

Common Misconceptions about Invoice Factoring

Invoice factoring is only for struggling businesses with money problems

In truth, invoice factoring is a way of managing your cash flow more effectively and efficiently. The process lets you use your customer invoices as collateral in exchange for cash, which the factoring company makes back by collecting on the invoices.

Many businesses use invoice factoring to expand their businesses because the invoice factoring process is quicker and easier than trying to apply for a business loan from a bank. It also frees up time you would otherwise spend chasing invoices and lets you focus on the growth and success of your business.

Factoring looks bad to your businesses customers

As mentioned above, your business can expand using invoice factoring services. Even if that is not the purpose, working with a factoring company should not be construed as bad in your customer’s eyes. Factoring is a method of outside funding. This type of capital is typically challenging to secure, so it is good if your business qualifies. However, factor approval is basically dependent on the creditworthiness of the business’s customers.

Invoice factoring has very minimal effects on your clients. Rather than making checks payable to your business, invoice factoring has your client write them out to the factoring company. The factoring company will take care of informing your customers of the change.

Factoring companies will harass your customers or clients with collection calls

This notion is completely untrue; a factoring company benefits the most when the relationship between business and customer is good.  To harm this connection would be to shoot itself in the foot. A good factoring company will be courteous and conscientious when following up with clients about payment on invoices.

Factors will strive to make the payment process more efficient and occasionally call to remind customers about a payment owed. However, in no way will they be harassing your customer.

Factoring is too expensive and will take a huge cut of value from your invoices

While factoring invoices does come with a fee, the exorbitant price tag many think factoring comes with simply isn’t there. Factoring costs are competitive and usually more reasonably priced than other financing options, with faster approval time as well.

With factoring, you are selling your business’s invoices and the factoring fee really can’t compare to the amount you’d owe on your borrowed money at the end of your loan period with a bank. Factoring will advance up to 90% of the value of your invoices upfront, and the rest is given to you when the customer pays their bill, minus a small fee the factoring company takes based on the turnover.

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