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what is invoice factoring

What is Invoice Factoring?

Invoice factoring is a business finance tool that gives an organization nearly immediate access to money their customers owe them without waiting 30, 60, 90 days – or even longer – for the invoices to be paid.

Instead of waiting for customers to pay, the business can factor an invoice with a factoring company for a small fee (called a factoring fee) and receive an immediate advance, which could be up to 95 percent (or even more) of the invoice amount.

Why do companies factor invoices?

Though the need for expedited or more consistent cash flow is the reason most companies factor invoices, some of the other common reasons factoring clients cite include:

  • Need to unlock working capital to fuel business growth
  • Working capital can be leveraged for better terms with suppliers
  • Customer accounts with generous terms, often 30-90 days
  • Need working capital to take on larger accounts or big orders
  • Slow-paying customers
  • More consistent cash flow
  • Better ability to meet operating expenses and payroll
  • Capital expenditures like equipment purchases, repairs, renovation or expansion

The practice of invoice factoring is centuries old and has played an important role as a means of business finance. Any organization, of any size, that provides goods or services to other businesses, government agencies, e-commerce selling platforms or other commercial organizations on payment terms may be able to factor receivables in order to improve cash flow and unlock working capital.

What type of businesses factor invoices?

Factoring clients come from many different industries where invoice factoring is commonly used to expedite cash flow, including:

  • Staffing and temporary employment agencies (security services, nursing, etc.)
  • Business consulting and B2B business services
  • Trucking, transportation, logistics
  • Supply chain distributors and manufacturers
  • 3rd party sellers like Zulily vendors and Amazon merchants
  • Vendors selling through Costco, Walmart and other mass retailers
  • Textile, clothing, accessories, and other wholesalers
  • Oil and gas (and all gas and oil field contractors)
  • Energy and utilities companies and contractors – and others

Nearly any type of company that invoices customers for payment or waits more than 15 days or more to get paid after completing delivery of goods or fulfillment of services might be able to improve cash flow immediately by factoring invoices.

How does the invoice factoring process work?

Invoices factored are typically funded within 1-2 business days – up to 95 percent (or even more) of the face value of the invoice, with the remainder placed in reserve as a holdback, pending customer payment of the invoice.

As an example, if a businesses completed delivery of goods or services to a customer and generated an $18,000 invoice, with net 30 (or even longer) terms, they could unlock most of that working capital within hours instead of waiting weeks or even months on payment.

Assuming a factoring fee of 3%, and an advance rate of 95%, here’s how it would work:

Invoice Factoring Process Overview
Day 1 – Generate a $18,000 client invoice and factor it
 – 24-48 hours Receive an advance of $17,100 (95%)
Factoring company earns $540 (3% factoring fee)
Day 30+ Receives the $360 holdback (2% of the invoice amount) after the invoice is paid

What are the benefits of invoice factoring?

Faster cash flow!

Businesses that want to expedite payment of accounts receivable invoices can turn to a receivables factoring company. Instead of waiting on customer payments, they can factor a customer invoice on the same day it is generated and receive and advance of up to 95 percent of the face amount of the invoice right away.

Advance rates may be even higher, and factoring fees even lower for larger invoices or for companies who factor on a regular basis and receive a volume discount.

Factoring receivables enables you a business owner to focus on growing their business rather than chasing invoices or performing collections. They gain almost immediate access to working capital by speeding up cash flow, so they can reinvest in their company much more quickly.

Factoring receivables could also be the key to positioning your business to be able to take advantage of emerging opportunities.

Organizations that factor invoices expedite cash flow, which means they have more flexibility to meet operational expenses. They have the flexibility to extend more generous payment terms to their customers as a competitive advantage, and can reinvest working capital in their business more quickly in order to expand, service larger accounts or take on new customers.

There are also additional benefits for businesses that choose non-recourse invoice factoring over factoring with full recourse.

Non-recourse factoring is less common in today’s economy because non-recourse factors assume the credit risk for the invoices they purchase. When you factor invoices with a non-recourse factoring company, you may be able to completely eliminate financial risk from bad debt. Find out more about factoring invoices with recourse vs. non-recourse factoring companies.

Speed up cash flow and grow your business faster by factoring invoices instead of waiting 30, 60, 90 days or longer for customers to pay.

Since we have competitive rates and fees, working with us will not cost your business more, but it could help you get a better factoring agreement. You want to work with an invoice factoring company that goes from approval to funding quickly and looks for reasons to say “Yes!” when you submit invoices for factoring. Our factoring services offer low fees, high advances, and flexible terms, such as:

  • No long term contracts
  • No monthly minimums (you choose when and how much to factor)
  • Retain control of billing your customers or let the factoring company do the work
  • Non-recourse factoring (the factoring company assume the credit risk)
  • Spot factoring
  • Micro-factoring
  • Small invoices welcome!
  • Credit checks to help you vet new customers
  • No application or due diligence fees
  • No hidden fees
  • Fast approvals and funding

Most importantly, we promise a high level of customer service to our factoring clients. We want you to work with a financing partner who understands your preferences and unique business needs, saving time and reducing the stress of managing receivables. Take the next step and request a free, no-obligation factoring quote to find out if this business finance tool could help your company grow faster.

  • Average monthly sales or amount of invoice to factor