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What is Factoring?

Factoring is a form of business financing where a business receives cash against outstanding invoices from customers. Some invoice payments delay but that does not mean your business should come to a halt. You still need to work even if your customers are not paying their invoices. However, non-payment of invoices on the part of customers can result in cash flow problems. Some people acquire business loans to sort out the problem. Unfortunately, some business loan applications take time, and you may end up getting the cash at the wrong time.

Some business owners do not want to experience this problem and that is why they prefer invoice financing. With invoice financing, you can get the cash in your account within 24 hours. When you need cash urgently and you have reliable customers who have outstanding invoices, you can visit a reputable factoring company. They will verify the payment history of the customer and then they will offer you cash for the invoices. They usually offer 70% to 95% of the value of the invoice. This means that if a customer owes you $1000, the factoring company is likely to give you between $700 to $950 for your invoice.

The value of the invoice depends on two main factors. The first one is the size of the company. If the company is big, the invoices are valued higher than invoices from small companies. Another thing that determines the value of the invoice is the age of the invoice. New invoices are valued higher than old ones.

Advantages of Invoice Factoring

Invoice factoring offers quick cash to people who need money urgently for their business. If customers have outstanding balances and you are certain that they will pay, you can factor that invoice. Invoice factoring process is also easy and if you do not qualify for a business loan, you are likely to qualify for invoice factoring. You can receive the cash in less than 24 hours after application. The most important requirement is the customer’s payment history. When you factor your invoices, you do not need to worry about unpaid invoices. The outstanding invoices become the responsibility of the factor. You will no longer need to task yourself with the collection of invoices.

Disadvantages of Invoice Factoring

Invoice factoring is expensive and you may end up paying more than you planned for if the customer does not pay on time. Some factoring companies also lock up their business in contracts and all invoices will be funded by the factoring company. due to the contract, the business will still need to factor the invoices even if he or she can wait for the customer to pay the invoice.

How to Select a Factoring Company?

Although you can walk into any factoring company and receive cash for your outstanding invoices, you will need to deal with a company that offers favorable terms. This is how to choose a factoring company.

  1. You should only contact a handful of companies. Some business owners will decide to apply to as many companies as they can. The truth is that numerous applications can overwhelm you and make it difficult to make a good choice. Applying to a few good companies will help you to compare and make a better choice.
  2. You can also check how long the factoring company has been in business. People who have been in business for at least five years know how to manage factoring portfolios better. There are exceptions though. Some companies who not been around for long but they have managed to gain the trust of other business owners.
  3. You should also consider the advance rate. The advance rate is the rate at which the lender will offer you the cash for your outstanding invoices. The rate is usually between 70% to 95%.
  4. Most factoring companies specialize in certain industries. They know the way such businesses are run and they also know how best to help them. You should check if the factoring company you want to deal with deals with businesses in your industry.
  5. You should also check if the factoring company deals with businesses that have sizes that are similar to yours. Some companies prefer to deal with huge invoices while others prefer small invoice amounts. It mostly depends on the size of the company. A big company will have huge invoice amounts.
  6. You should also check if the factor deals with minimums or not. Some factoring companies will give you a minimum number of invoices you should submit. They will charge you a financial penalty if the invoice does not reach the minimum price quoted. Other companies are flexible and they allow businesses to only bring invoices they are willing to factor.

Difference Between Recourse and Non-Recourse Factoring

Recourse factoring means that the factoring company is not entirely responsible for the outstanding invoices. If the customer is unable to pay the invoice, the business takes responsibility for the outstanding invoices.

Non-recourse, on the other hand, allows the business to sell the invoices to the factoring company. In this case, the factoring company is entirely responsible for the invoices. The factor assumes all the risks associated with the invoice.

Some factoring companies offer both recourse and non-recourse factoring.