What Is a Factoring Company and How Does It Work?
A factoring firm is a third-party financial organization that provides cash in return for ownership of a company’s unpaid bills. The factoring firm, also known as an invoice factoring company, an accounts receivable factoring company, or even a factoring receivables company, will usually take over the duty of collecting the invoice amount from a business’s client after this transfer of ownership. Invoice factoring differs from invoice financing in this way.
Factoring firms, in essence, assist businesses in increasing their cash flow while they wait for consumers to pay for their services. Invoice factoring may be the perfect option for you if you’re a B2B company (or any other company that bills clients) and need to free up cash held in unpaid invoices.
What is the best place to look for invoice factoring?
We’re here to assist you. In this article, we’ll go over everything you need to know about invoice factoring, including some of the best factoring businesses and what they have to offer, as well as how to choose the best factoring company for your organization.
How Invoice Factoring Firms Operate
Invoice factoring is a highly unique kind of finance when compared to other forms of company loans.
As previously said, if you need immediate payment for your services, you may contact a factoring business to assist you in obtaining the funds that your clients owe you.
To put it another way, when you engage with an invoice factoring business, you “sell” your outstanding bills to the company in exchange for a cash advance—typically about 80% of the invoice amount. The factoring firm will usually handle the collection of your clients’ invoice payments after that. In this manner, invoice factoring differs from invoice financing in that the business owns the invoices.
It’s worth noting, however, that these two words are often used interchangeably, which means some factoring firms may not collect money directly from your clients, allowing you to handle that.
In either scenario, when your customers pay their bills, you’ll get the remaining amount of the invoice value that the factoring business kept in reserve, less the costs the company earns for each week your client waits to pay.
Another significant distinction between invoice factoring and invoice financing is that with invoice financing, you must pay your costs after getting the money in reserve, while invoice factoring firms will collect their fees and then transfer the leftover funds to you.
As an example, if you have a $100,000 outstanding invoice and the factoring business you choose to deal with advances you 85% of that invoice, you’ll get $85,000 right immediately and the invoice factoring company will keep the other $15,000 in reserve.
Let’s suppose your customer pays their invoice after two weeks, which implies the factoring firm will charge fees on the reserve amount for two weeks. Accounts receivables factoring firms typically charge a 1% factor fee on the total invoice amount for each week your client takes to pay it. As a result, in this instance, the factoring firm will charge 2% of the entire invoice amount.
It’s also worth mentioning that a factoring business may impose a processing cost at the point of sale, which is typically about 3% of the total invoice amount. Assume that the factoring company in issue charges a processing fee of 3%.
When all fees are taken into account, the factoring firm will deduct 5% of the invoice value, or $5,000, from the reserve amount. At the end of the day, you’ll get $10,000 back from the initial reserve of $15,000, which means you’ll get $95,000 out of your $100,000 invoice.
The Top 5 Invoice Factoring Firms
Now that you know how invoice factoring works, you should be able to determine whether or not this kind of financing is appropriate for your company’s requirements.
Invoice factoring with a reputed factoring firm may be a fantastic option if you need fast funding to boost your cash flow. It’s worth repeating that most factoring firms don’t really give you money; instead, they basically buy your receivables at a discount, allowing you to get cash quickly.
However, because invoice factoring and invoice financing are frequently used interchangeably, you’ll want to make sure you understand the specific terms of any company you work with—so you know whether you’re responsible for collecting customer payments and paying your respective fees to the company.
You may apply for invoice factoring entirely online with BlueVine. This factoring firm helps businesses with unpredictable cash flow or lengthy payment cycles by providing clear, transparent terms and a quick, easy financing option. BlueVine will advance up to 90% of the amount of your bills, retain the remaining 10%, and charge a 0.25 percent to 1.7 percent fee each week your invoices stay unpaid.
BlueVine can pay invoices ranging from $20,000 to $5 million in as little as 24 hours after receiving your application. BlueVine, on the other hand, often pays its clients in two to seven days.
Furthermore, unlike other factoring firms, BlueVine does not notify your clients that you are getting advances for their overdue bills, enabling you to preserve your customer connection. As a result, instead of paying to your company account or address, your client will just pay to your BlueVine account. You’ll get the remaining reserve money minus BlueVine’s costs if your client pays on time.
However, if your client does not pay novice, you will be liable for paying BlueVine the remaining amount.
You must have a minimum of three months in company, a personal credit score of 530, and $120,000 in yearly sales to qualify for invoice factoring with BlueVine.
While BlueVine is an online lender, altLINE is The Southern Bank’s commercial finance subsidiary, which has been in business for over 84 years. AltLINE may offer funding to companies in the manufacturing and distribution sectors, as well as government contractors, despite the fact that they mainly deal with staffing and consulting organizations. AltLINE accepts invoice factoring applications online, with approved companies receiving money in as little as 48 hours.
AltLINE may factor up to $4 million per month and up to 90% of an invoice amount with this in mind. They do, however, finance clients on a monthly basis for approximately $500,000 on average. In this vein, it’s worth noting that in order to deal with altLINE as your invoice factoring business, you must be able to factor at least $15,000 each month.
AltLINE, on the other hand, is a genuine factoring business, meaning they will buy your unpaid bills and handle the collection procedure for you. They’ll advance you the difference once they collect the unpaid invoice, less their costs. For the first 30 days when an invoice is overdue, factor costs from altLINE typically range from 0.5 percent to 3%. After 30 days, altLINE will gradually raise the factor charge every 15 days until it reaches a maximum of 5%.
AltLINE requires a minimum credit score of 500 to qualify for funding; there are no yearly income or time in business requirements. AltLINE will assess your clients’ creditworthiness throughout the underwriting process. AltLINE like to observe if your company works with a big number of major customers or a large number of smaller businesses.
AltLINE will not deal with companies that have had two or more bankruptcy filings, a prior loan default, or a significant tax lien filed against them.
Payplant is an invoice factoring business that offers no contracts, no minimums, and no hidden costs.
Payplant is an online lender with a “Pay Me Now” service that provides on-demand invoice factoring. Payplant will advance you up to 90% of the invoice amount via this service, and you can select which bills to finance (usually up to $1 million).
Payplant, like altLINE, is a true factoring business, which means they’ll manage your clients’ payments. When your client completes their payment, they will transfer the remaining balance, minus their costs. Factoring costs at Payplant start at 1.2 percent per month for a minimum of 30 days.
Payplant allows you to apply for invoice factoring online, and a representative will call you to discuss your application. Payplant has the ability to fill your account in as little as 72 hours.
Payplant does not provide precise criteria on their website, however they do say that tiny private businesses or startups may face higher charges since creditworthiness of bigger organizations is easier to assess.
Payplant, on the other hand, may be a fantastic choice for quick accounts receivable financing since it has no monthly minimums and no long-term commitments. Additionally, you may estimate your rates using the Pay Me Now calculator on the Payplant website, as well as enter your basic company information to get an immediate quotation.
Triumph Business Capital
Triumph Business Capital is a publicly listed bank that provides a variety of lending options. However, invoice factoring will be the most accessible option for small companies.
Triumph can finance bills up to $5 million, and you may start the application procedure online and get funding in five to seven days. You won’t have to worry about collecting payments from your customers if you choose Triumph as your factoring business, but you will be able to monitor progress via online statements and an online dashboard.
To qualify for Triumph invoice factoring, you’ll need $100,000 in yearly sales, a credit score of at least 500, and at least one year in operation. It’s also worth mentioning that Triumph charges a $300 origination fee.
Although Triumph doesn’t specify their factor fees on their website, they do state that your fees will be determined by your unique agreement—their experts will consider whether you’ve chosen recourse or non-recourse (meaning the lender assumes the risk for unpaid invoices) factoring, as well as the credit quality of your customers—among other things.
Triumph also offers you the opportunity to explore their other financing solutions as your company develops, and if required, will work with you to find a better solution if your firm’s finance requirements evolve.
Finally, the final choice on our list of the top factoring businesses is a company that finances invoices. However, Fundbox is an alternative that company owners should think about in addition to factoring, and it may even be a better match for you than conventional invoice factoring.
You may borrow up to $100,000 from Fundbox and pay it back over a 12- or 24-week period. Fundbox, unlike conventional factoring firms, pays the whole invoice amount rather than a portion. The principal, transaction fees, and advance fees are then repaid over the specified period. You may also pay off the principle and avoid any remaining costs by paying it off early.
Furthermore, Fundbox offers one of the most straightforward application procedures available—all you have to do is create an account and link your accounting or invoicing software. In as short as one day, Fundbox may accept your application and transfer money into your company bank account.
Having said that, unlike the other invoice factoring firms we’ve covered, Fundbox will expect you to collect on your bills. As a result, as previously stated, you are also liable for repaying the cash you borrowed, as well as any costs (essentially making this an asset-based loan). Fundbox’s invoice financing interest rates start at 4.66 percent.
You’ll need a minimum credit score of 500, $25,000 in yearly revenue, and three months in company to qualify for this funding.
In this manner, Fundbox is a fantastic choice not just for startups and less qualified company owners seeking for invoice finance rather than factoring.
How to Pick the Best Factoring Company for Your Company
You’ve probably already determined that invoice factoring is the best business finance option for you if you’re searching for an invoice factoring firm.
If that’s the case, you’ll want to make sure you choose a factoring firm that will work as a partner with your company and assist you deal with any cash flow problems caused by past-due bills.
To guarantee that you select the best factoring company for your business, consider the following questions while assessing any factoring firm.
Will you insist on my using accounting software?
Some factoring firms, particularly those with sophisticated technology, may need you to interact with them using accounting software. To complete your application, Fundbox needs you to link an accounting or invoicing software to your account.
As a result, before working with any invoice factoring business, be sure to ask this question first.
How much of my invoice value will be advanced to me?
As previously stated, each invoice factoring business may advance you a portion of your outstanding invoice. Some people will be able to progress faster than others.
You’ll want to be sure the business you select is serious about their offer and that the advance will help you meet your cash flow requirements.
What are your charges?
Most factoring firms will charge you a percentage fee for each week your clients take to pay their bills, as we’ve seen. However, certain businesses may charge extra or different costs in addition to the usual factor fees. Triumph Business Capital, for example, charges a $300 origination fee (as previously stated).
Some invoice factoring firms may impose monthly minimums, service fees, renewal costs, money transfer fees, or termination fees.
Before working with a business, be sure you fully understand any and all costs that will be charged.
When do I have to pay back the loan?
Some factoring firms ask you to repay the advance within a specific amount of time, while others will only be reimbursed when your client pays.
If you’re considering a factoring business that has a fixed repayment period (like Fundbox), be sure you know how you’ll return the money if your client doesn’t pay on time.
Who will be responsible for the debt?
Some factoring firms, as we’ve mentioned throughout, will take over the collection of the invoice and own the debt completely, while others will not. You must determine the kind of invoice factoring business you are considering and, as a result, who is in charge of invoice collection.
Many company owners dislike having a third party contact their clients about unpaid invoices. If you don’t want to end up in this position, be sure you’re only comparing situations in which you’ll be the one to pay off the debt.
How simple will it be for us to collaborate once more?
One of the advantages of dealing with a factoring business is the ability to establish a long-term connection.
Cash flow issues will very certainly arise again, and it’s good to have a place to turn when they do.
Some factoring businesses make it simpler to work together again than others, so be sure to inquire about how that connection will develop in the future.
Most Commonly Asked Questions
What exactly is a factoring firm?
What is the process of a factoring company?
What is the typical lending rate for a factoring company?
In the end, invoice factoring is a simple and dependable method to alleviate cash flow problems and keep your company going ahead. As previously said, there are a number of reliable invoice factoring businesses that provide big advances with low fees—as long as your customers pay on time.
Of course, since you’re paying to access your own money with this kind of financing, you won’t ever see the entire invoice amount, as each factoring firm has its own costs. However, if your company is cash-strapped, invoice factoring may be a feasible alternative for you to keep going.
However, before choosing which kind of business loan is ideal for your company, you should always examine all of your funding alternatives, including other types of business loans.