Frequently Asked Questions
What Is Invoice Factoring?
Invoice factoring is a cash-flow solution in which a business sells its receivables (invoices) to a factoring company at a discount in exchange for immediate working capital. Businesses use invoice factoring to improve their available cash for use towards payroll, expenses, or growth.
How Does Invoice Factoring Work?
Once you choose a factoring company that meets your business needs, the process of factoring is simple.
When you are ready to fund, send your invoices to the factoring company.
The factoring company advances you a percentage of the invoice value.
Your customer pays the invoice to the factoring company on the agreed-upon terms.
The factoring company pays you the remaining invoice amount less a fee for the service.
Do I have to factor everything?
The beauty of invoice factoring is that it is there for you when you need it. Invoice factoring companies do not require you to factor everything, only those invoices that you choose to factor based on your cash flow and business needs. There is also generally no long-term commitment with factoring. Many companies only choose to factor the invoices from customers that historically take a long time to pay, while some factor all of their invoices.
When should I start factoring?
As soon as your company becomes eligible, by providing goods or services to your customers, and generating invoices, you can consider invoice factoring. You may decide to inquire about invoice factoring from day one, but especially in the following circumstances:
You are experiencing cash flow challenges – your business is healthy, but the cash is not flowing, and you are finding it hard to pay your operating costs, so the ability to grow is hindered. Receiving a cash advance on your outstanding invoices would help alleviate cash flow problems and allow you to grow your business as your cash flow builds.
Waiting for payment is taking its toll – not only waiting for payment but also the effort it takes to get your customers to pay. Allow your factoring company to take on the burden of collections so you can get on with running your business.
Why do companies like to factor their accounts receivable?
Companies like the flexibility. Invoice factoring offers companies the ability to receive a cash flow injection when they need it. Your company may like factoring for the same reasons:
Less stress – late payment of invoices may cause cash flow stress
Fast cash – no more waiting on slow paying clients
No loan liability – using your own receivables as collateral means factoring will not show up on your balance sheet
High financing limits – unlike traditional loans, the limits are high
Expert management – a professional A/R team manages the receivables you factor, saving you time and A/R management expenses
Does it matter where my business is located geographically?
No. Factoring is a virtual service – everything can be done over the phone, email, fax, wire and mail. This means your business can be located in any city or state and still qualify for accounts receivable factoring.
Do Factoring Companies do Credit Checks?
Factoring companies check the credit of your customers. That is the main variable in invoice factoring. They will look at your personal and business credit, not for a minimum score, but to make sure there are no open liens, filings, or judgments that may cloud your good open accounts receivable.
How Much Does Invoice Factoring Cost?
Factoring fees and factoring advance rates vary greatly among other factoring companies. Advance rates run from 75-90% while the fees can be anywhere from 1% to 4% per 30-days and then a daily or weekly prorated factoring rate thereafter.
Are accounts receivable fees deductible?
Yes. It’s deductible as a business expense.
What does my business need to provide to start factoring?
Your business will need:
– An accounts receivable aging report
– A list of your customers
– A list of the invoices you want to factor
– Articles of Incorporation