When businesses need cash in a speedy manner, they look to a factoring company to receive funds from their unpaid and open invoices. The factoring company, or factor, will review your accounts receivable and upon approval, will advance you a certain percentage of the overall value of your submitted invoices. Business factoring is a great tool because your personal and business credit history is not considered during the process. Product and service-based businesses will greatly benefit from business factoring. Qualifications for factoring services include your monthly invoices and the credit worthiness of those that owe you.

To start the process, gather and make copies of the outstanding invoices you want funded and make sure all of the required information is filled out. The factor will perform a variety of checks on your clients to make sure they will be able to fulfill their invoice. This information will also help the factor to determine how much you can receive and the discount rate they will charge. After the information has been verified, the factor will send out a notice of assignment, which informs your clients that their invoices should be paid to the factor and not your business. You can expect to receive your funds in two to five days, or even 24 hours if the factor allows for online invoicing. Your initial payment will range from 70 to 90 percent of the total value of your submitted invoices and you will receive the remainder once the factor has collected the rest from your clients.

There are many different elements that make up the costs of business factoring. Expect to pay one to five percent of the accounts receivable total value as the discount rate. Extra costs include what type of factoring and billing you choose, the reliability of your clients ability to pay, the type of industry you work in, set up costs and how many invoices you submit.

The benefits of factoring include the opportunity for financial advances, quick access to funds, the opening for more funding and the chance to focus on your business while the factor works on your collections. On the other side, disadvantages include paying a higher discount rate if your clients deem themselves as slow paying or have poor credit. If your client fails to pay their balance, this can also increase the total costs of the factoring services. Properly assess your clients’ ability to pay before you start the factoring process.

You will have the option of choosing between recourse and non-recourse factoring.

Recourse factoring is more affordable, but if a client defaults on a payment, you will be held accountable. Non-recourse is more costly, but the factor will hold all responsibility if your client cannot fulfill their payments.

Once you decide on which type of options you will opt for, there are few key items that will help lead you to the right vendor. Compare vendors and their customer support during the process, experience in the field, professionalism with your clients, references and how long the company has been in business before you sign the contract. Also keep in mind that you can negotiate for more money up front and submit fewer invoices of higher amounts to keep your total costs low.



Thanks to Merrin Muxlow for contributing this article to our Factoring blog:

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Can you answer Kar’s question about Factoring?:

how can i get financing to start a business
all banks require minimum 2 year old business to give a loan
no one give a loan for new business
does someone knows a bank who gives a startup business loan ?
the thing is that i just turned 18 so i dont have credit history
i want to get loan under my mom’s credit she’s credit score is 670 i think
so its also a problem because the banks require exelent personal credit 670 is not exelent
and the thing is that i need just 20,000 to 30,000 the banks give loans for up to 100,000
i cant get just 30,000 from them
what to do ?

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