Invoice Factoring FAQ – Frequently Asked Questions

Invoice Factoring FAQ: Why Factor Invoices?

Why do organizations unlock the working capital represented by unpaid customer invoices, instead of simply waiting for customers to pay?

Companies that factor invoices can focus on growing their organization instead of chasing invoices or performing collections. Saving time and money on accounting activities are only one benefit for companies that factor invoices. An organization might also choose to factor invoices when:

  • They want to offer extended terms to their customers as a competitive advantage
  • Immediate access to capital will enable them to take advantage of new business opportunities
  • Faster cash flow will let them take on new business, serve larger accounts or fulfill bigger orders
  • They have slow-paying customers who occasionally take 30 days – or longer – to pay
  • They need to improve cash flow in order to meet operating expenses
  • They want to negotiate discounts for early payment with their own suppliers and vendors

The opportunities lost by an organization during the time they wait for customers to pay is often referred to as “opportunity cost.” These include any activities an organization must forego or decline because cash flow isn’t keeping pace.

Invoice Factoring FAQ: What is Invoice Factoring?

Invoice factoring is a centuries old business finance tool which allows organizations that invoice their customers for payment to receive immediate payment by factoring them with a third party, called a Factor, for a small fee, called a factoring fee.

Invoice factoring has several synonyms, and is sometimes referred to as:

  • Receivables financing or receivables factoring
  • AR factoring (or A/R factoring)
  • Accounts receivable or account receivables factoring
  • Invoice financing, invoice discounting or invoice factoring

No matter which term is used to refer to the process, invoice factoring is a financial transaction whereby a business factors a customer invoice with a third party – called a Factor or Factoring Company – for a small fee. We can help you find companies that offer low invoice factoring fees starting from 5% and advances ranging as high as 90%.

Invoice Factoring FAQ: What sets the best invoice factoring companies apart?

We believe the best invoice factoring companies seek to minimize the cost of factoring while maximizing the benefits of factoring receivables for their clients. They earn their clients’ business, day in and day out with competitive factoring rates, flexible options and superior customer service.

Every factoring company offers unique perks that might make it more or less appropriate for your organization’s factoring needs. Some of the things we can help you find are:

  • Experienced teams – our team has decades of business finance experience, and we put this expertise to work for our clients
  • Low factoring fees and high advances
  • Fast approvals and high approval rates – companies that look for reasons to say “yes!” instead of no
  • Fast funding
  • No hidden fees that jack up the cost of factoring
  • Flexible options that keep you in control (no factoring minimums, no long-term contracts)
  • Add-ons like free credit checks on your customers
  • Industry discounts or industry-specific benefit programs

Invoice Factoring FAQ: What is Opportunity Cost?

The longer customer invoices go unpaid, the less working capital is available to the organization. Limited access to working capital equates to limited means to take advantage of opportunities to grow.

These missed opportunities are what is referred to as opportunity cost; it is the ‘cost’ an organization pays when they don’t use invoice factoring to unlock the working capital tied up in customer invoices, so they can use it to grow more quickly.

Lost opportunities (or opportunity cost) includes all the things a company can’t do because cash flow doesn’t permit it. This could include:

  • Having to wait to take on new business
  • Being limited in the size of orders a company can fulfill
  • Being limited in the number of customers a business can serve
  • Being unable to take advantage of vendors’ early-pay discounts
  • Being unable to extend better payment terms to customers as a competitive advantage
  • Inability to pivot quickly to take advantage of emerging opportunities

What is an Opportunity Cost Calculator?

An opportunity cost calculator (or invoice factoring calculator) can show you how much working capital you could unlock by factoring invoices instead of waiting for customers to pay. By definition, any opportunity your business can’t take advantage of because it’s not factoring to unlock working capital more quickly is the “opportunity cost” to your business.

By calculating opportunity cost, you can find out how unlocking the working capital tied up in customer invoices could allow you to expedite cash flow if you factored invoices and put the money to work to grow your business faster.

Take the next step and request a free, no-obligation quote for receivables financing – you could go from approval to your first funding in hours.

Request more information about Invoice Factoring as a Cash Flow financing tool.

  • Average monthly sales or amount of invoice to factor

Invoice Factoring FAQ – Glossary of Terms

What are some of the most common Invoice Factoring terms?

Even though invoice factoring is a centuries-old business finance tool, some of the common terms used in the process of factoring invoices might be unfamiliar to those who have not factored receivables before.

Who are the parties involved in the invoice factoring process?

Factor (or factoring company): An organization who purchases B2B accounts receivable at a discount to expedient the cash flow for their client.

Factoring Client (or Client): the Factor’s customer.

Account Debtor (or Debtor): the Client’s customer.

Here are some common terms related to the process of factoring invoices itself:

Factoring Advance Rate: The percentage of a submitted invoice paid out to the Client at the time the invoice is factored.

Funding: The process of delivering money to the Client for the purchased invoice.

Factoring Fee (or financing fee or discount rate): The percentage of invoice amount or fee that is retained by the Factor, agreed-upon at the time of documentation for invoice factoring.

Opportunity Cost Calculator (or invoice factoring calculator): A calculator providing results that show how much working capital is tied up in customer invoices as well as the fees related to gaining immediate access to the working capital represented in total accounts receivable.  The term opportunity cost refers to the opportunities a business loses due to slower cash flow while waiting for customers to pay.

Reserve: The difference between the invoice amount and the Advance + Factoring Fee that is held back by the Factor until an invoice has been paid (by the Debtor).

Reserve Release: The delivery of reserve funds paid to the client when an invoice is paid by a Debtor.

Recourse vs. Non-recourse factoring companies

Finally, it is also important to distinguish between types of factoring companies, those that factor invoices without recourse (also known as non-recourse factors) and those that factor with recourse:

Recourse Factoring (or full recourse factoring or factoring with recourse): Recourse Factors do not assume the credit risk for the invoices they factor, and the client will be required to buy back invoices they have factored which have not been paid in a timely manner by the account debtor, and may also incur related collections fees. Most factoring companies factor with full recourse.

Non-recourse Factoring (or non-recourse factoring or factoring without recourse): Non-recourse factoring companies assume the credit risk for the invoices they factor. Organizations that factor with a non-recourse factoring company can reduce their financial risk from bad debt (or even eliminate it entirely).

Non-notification Factoring: Non-notification factoring minimizes contact between the factoring company and the factoring client’s customers, often using white-labeled forms which maintain the client’s brand in customer invoices, statements and correspondence. When the customer pays factored invoices, those payments are then addressed to a unique lock-box or paid electronically into a deposit account belonging to the factoring company (though still officially branded to the factoring client). For the customer, this creates a seamless experience that protects and reinforces the factoring client’s brand.

We would be happy to answer any questions you have about invoice factoring. Request a quote and we’ll reach out to you with more information.