Are you one of the many small/medium businesses in American facing cash flow challenges? If you are, it may be partly due to the delay between when your customers receive orders from you and when they pay their invoices.
That’s where factoring services can provide some relief. Companies can sell their outstanding accounts receivable to a third party (called a factor), receive prompt payment from the factoring company, and leave the collection of the invoice to the third party. It's also called receivable factoring. The best option however is ‘modern factoring’ - Resolve is an example of a modern net terms solution that is better for your customer relationships than factoring.
Of course, it’s not quite as simple as that. First of all, the factoring company can conduct a fairly detailed credit investigation into the customer before putting any agreement into place. The factoring company will withhold a percentage of each invoice they finance plus fees. And some factoring companies are quite aggressive in their collection activities which can put a strain on your relationships with your customers.
However, with a good, professional factoring company, this can provide some working capital and relieve your cash flow challenges. You’re free to use the money paid out in any way you need to run your business. Note: some factoring companies pay a portion of the invoice upfront, and the remainder when they receive full payment. Make sure to read their agreement carefully so you know exactly what to expect—and when to expect it.
Using a factoring company does not oblige you to use them for every invoice. You may choose which invoices you factor and which you manage in-house.
Invoice factoring involves selling an invoice to a factoring company. Once the transaction is complete, the business selling the invoice won’t have anything to do with collection/payment of the invoice.
Invoice financing/receivable financing involves borrowing funds from a lender based on outstanding invoices. The loan is secured by the amount of the invoice, and approval depends on the value of the invoice and the creditworthiness of both the business that issued the invoice and the business responsible for paying the invoice.
The most common categories for financing in both categories are business-to-business (B2B) and business-to-government (B2G).
If you choose to use invoice factoring, the factoring company you choose is very important. One of the first questions to ask however is, do you really need factoring? Net terms financing solutions like Resolve are safer and better for your reputation than factoring, in fact Resolve is described as ‘the modern version of factoring’. Here are some things to look for if you’re stuck on a traditional factoring company:
- Company Reputation: What do reviewers say about the company? Do they have a BBB rating or complaints?
- Factoring Fees: What are the fees? How do they compare to other factoring companies? Do they have an application fee? How does their pricing compare to other companies?
- Credit Requirements: What are their credit requirements for you and for the customers whose invoices they’ll purchase? Do they need your credit history? Are low rates only tied to good credit?
- Funding Timeframes: How long will you wait to receive payment for an invoice? Does the information on their website line up with customer reviews?
- Features: Do they offer solutions for managing invoices? Can you integrate the factoring into your current accounting software?
- Invoice Restrictions: Does the factoring company have minimums and/or maximums for factoring invoices? Do these numbers fit with your average invoices or cash flow needs?
- Repayment Terms: Do they provide non-recourse factoring? Or will there be penalties if invoices remain unpaid? Will they charge your business additional fees if customers take longer to pay their invoices than the net terms allow?
- Time in Business: Has the company established credibility in the factoring field? A newer company isn’t necessarily a bad thing, but you want to make sure you're working with a company that will still be around next year.
- Mobile/Web Applications: If you operate your business on the go, a company that provides mobile application and account services may be more convenient.
Different factoring companies have different specialties. Some work exclusively with a single industry such as construction or medical supplies. Others work primarily with large corporations or small businesses. Find out which company is right both for your industry and for your specific business needs. They may have requirements for minimum time in business (usually you need at least a year in business before you can qualify for factoring).
If your business is looking for factoring for larger invoices, pay close attention to any additional borrowing costs that may make the process unsuitable. Any confusing terms about fees—or vague promises—can also indicate the potential for higher fees.
Companies may charge as little as 0.50% for factoring, and not all charge additional fees. However, it is common practice to charge increasing fees the longer it takes to receive payment for an invoice.
There are companies that provide invoice factoring for international currencies. However, they tend to have higher revenue requirements for approval.
That really depends on your unique situation. Overall, invoice factoring provides much-needed cash flow with a shorter/simpler application process than a small business loan, business line of credit, or other traditional financing options. If your accounts receivable department is unable to keep up with delayed invoicing, factoring can help and it can help avoid carrying bad debts.
Unlike a business loan which often ties the use of funds to a specific item or need, you can use the funds from invoice factoring for anything you may need to run your business.
However, factoring isn’t ideal as a long-term funding solution—especially if you have customers that take more than 30 days to pay their invoices. Then, the cost becomes much higher and could impact your business operations.
Along with long-term financing options such as loans and lines of credit, there’s a solution that businesses are increasingly turning to when they need a cash flow solution. It’s called digital net terms. With this system, the company acts as your credit team enhancer—checking your customer’s credit, advising on net terms, and then paying up to 90% of an approved invoice in 1 day.
One company offering digital net terms is Resolve. They work with US-based manufacturers, wholesalers, and distributors to facilitate deferred payments (also known as net terms). And, they enhance your ability to offer net terms to your customers—something that consistently encourages more sales and bigger invoices.
Yes. This is known as load factoring, freight factoring, transportation factoring, trucking factoring, or freight bill factoring. For many trucking companies and owner-operators, the divide between the immediate demands for fuel payments (and other costs) and the payment of invoices from brokers or customers can create challenges. Load factoring helps bridge this divide.
Again, factoring is not a loan or debt. It’s the sale of an asset (the invoice) and takes the invoice off your accounts receivable.
Some factoring companies deal exclusively with trucking companies. Others include the trucking industry as one of many that they serve. One of the unique offerings for trucking companies is assistance with fuel payments. Freight factoring companies often offer discount fuel card programs that can be used at national or regional chains, and fuel advances in as little as one hour—a clear advantage for truckers.
There are sometimes referral programs that pay out cash for qualified referrals so it doesn’t hurt to ask around and see what other trucking companies recommend.
As with all factoring companies, be sure to check out their reviews, their terms, and all of their fees and charges. Not all are created equal. Once you become a client, some companies will provide a pre-approval list of clients which eliminates the onboarding process and speeds up payments.
Other perks to look for include equipment leasing, trucking-related software, mobile apps, and multiple channels for customer support (ie. email, phone, chat). You can check TrustPilot and the Better Business Bureau® for reviews of many freight factoring companies.
Some final tips about freight factoring: Be sure to clarify whether the company allows for short-term agreements, and what (if any) termination fees are involved. If the company makes it hard to get out of a contract, it may be a sign that their commitment to customer service is lacking (and that the cost of doing business with them is too high).
When you start to look at the pros and cons of various invoice factoring companies, one term that comes up regularly is non-recourse factoring. This can be an important selling feature for businesses.
Basically, non-recourse factoring means that the factoring company won’t hold you responsible for loss if an invoice doesn’t get paid by a customer. Obviously, businesses are looking for clients that are good candidates for long-term relationships, and who are likely to continue to pay their outstanding invoices. But this doesn’t always happen, and not all factoring programs will carry the risk of unpaid invoices.
As we know more than ever before, the unexpected does happen, and businesses do close without warning—or they fail to pay an invoice for any number of reasons.
The term comes from agreements where, if a customer didn’t pay an invoice within a set amount of time the factoring company would “recourse” by asking the client to repurchase the invoice. The business could either provide another outstanding invoice for the factoring company to take over, or the factoring company would take out cash from the reserve account.
Considering that factoring is done by companies already experiencing cash flow problems, recourse factoring can make financial situations much worse.
Although non-recourse factoring seems to be the ideal avenue to choose, the fine print in any contract will reveal how expansive or limited the non-recourse is. Often it will only cover situations where the customer files for bankruptcy or becomes insolvent.
Look for the following situations where factoring companies generally won’t cover non-recourse factoring: when invoices are disputed, when the business has contravened their agreement with the factoring company, where the client has taken actions that make a credit problem worse, where invoices are offset by other funds owed to the debtor, or where the client has violated the terms of the factoring agreement.
Determining whether to use recourse or non-recourse factoring requires a bit of an evaluation of the risk involved. It can be helpful to use non-recourse factoring when you want to close out your receivables (for quarter-end or year-end), or when you have a generally solid customer base and want to factor only a few invoices.
In exchange for taking on the additional risk of unpaid invoices, companies that offer non-recourse factoring generally have lower maximum limits, may restrict the number of client’s invoices a customer can factor, charge higher fees, behave more aggressively when collecting payments for invoices, or require volume commitments.
Non-recourse factoring is still used fairly often, so it’s clear that for some businesses the advantages outweigh the disadvantages.
One thing to consider is your customers. If you are looking to factor invoices from customers you know normally pay their invoices on time and have a good reputation in the industry, you may be more comfortable using recourse factoring.
The minimum requirements will vary depending on the factoring company. As with all financing/lenders, the bigger lenders such as big banks will generally have more stringent requirements, and in exchange offer better terms.
Smaller lenders like credit unions, independent financing companies, and online lenders may have fewer requirements but may charge higher fees and/or have stricter terms.
Many factoring companies will require a minimum of one year as a business before you can apply. Some will take your personal credit as well as your business credit into account. In these cases, your own credit score, credit risk, and debt load may be evaluated.
Some companies will require revenue into the high six figures. Others will look primarily at your client’s credit to determine approval. This brings up an important point. Some factoring companies are much more aggressive—both in determining creditworthiness and in pursuing late invoices. This can impact your relationship with your customers. Reviews are a helpful way to check into a company’s practices before working with them.
Other requirements can include net 30 invoices only, minimum monthly revenue, providing a qualifying business plan, and a minimum business credit score. Factoring companies should provide clear guidelines for what their minimum requirements are. Feel free to contact a few companies so you can compare requirements.
Give yourself at least a week to proceed through the application process. It takes time to provide all the documentation, and for the factoring company to run their background checks.
If you need funds sooner than that, or would like to work with a reputable company that conducts less invasive checks, consider digital net terms as an alternative through a company like Resolve.
This is an important aspect of factoring to consider. Invoice factoring services have their own language! And there is potential for hidden fees and factoring costs. Understanding the different types of fees can protect you financially. Not all factors will charge these fees, so if you see them in an agreement, be aware they may add up (and you may want to look for a factoring company that charges fewer fees).
- Application/Origination/Account Set-up Fee: A single charge for setting up an account with a factoring company
- Credit Check Fee: A charge for each credit check a company performs on a customer before agreeing to factor an invoice.
- Non-Recourse Factoring Fee: Charged for non-recourse agreements.
- ACH Transaction Fee: For any ACH transactions between your business and the factor.
- Wire Fee: For any transactions done by wire transfer between your business and the factor.
- Incremental Fee: For agreements where the discount rate is a flat fee, the factor may charge a fee to increase the total discount you pay. Ranges from 0.35% to 1%.
- Monthly Minimum Volume Fee: Charged if the total of your invoices in a month doesn’t meet a minimum fee amount. This may occur when you have multiple low invoice values in a month.
- Unused Line Fee: Some companies will charge a fee based on the average amount of factoring available that you don’t use.
- Lockbox/Service Fee: Ranging from $50 to $500 a month, this is a fee the factor charges to keep invoice payments in a separate lockbox or account.
- Overdue/Collection Fee: Charged if the factor needs to take action to collect overdue payments from an invoice. Watch out for this one—it can be very costly.
- Renewal fee: Charged each year that you choose to keep an agreement with a factor.
Factoring rates may increase when invoice payments are late—and may continue to increase. These rates should be clearly set out in every contract.
Factoring companies may offer spot factoring or contract factoring. In agreements that allow spot factoring, you can sell single invoices to the factoring company. This can be helpful when you need an occasional boost to your cash flow, but don’t require regular factoring for your customer. It's usually far less expensive than taking out a cash advance, and some companies offer one day funding.
Not all companies offer spot factoring, because the investment in the application process is the same, but the payoff to the factoring company is less. If they do offer it, they may charge you higher fees or have more stringent terms.
Contract factoring involves long-term contracts and agreements based on the value of the invoices. So you might be required to factor a minimum amount per month (usually at least $10,000), or you may need to factor all invoices for the duration of the agreement. These agreements often charge lower rates than spot factoring.
Contract factoring is better for larger companies that can comfortably meet the requirements every month. If you need a more flexible arrangement, consider other options like digital net terms.
Even the best factoring company will have some drawbacks. Consider all your options before determining how to proceed.
Factoring companies can decline to factor invoices if your customer is a credit risk. Running credit checks on each business is standard procedure. If you have a customer that gets turned down by a factor, you won’t be able to factor any of their invoices. That means you won’t have access to that cash flow, and it means extending net terms to that customer is riskier than a customer with good credit.
When you factor an invoice, you’re giving the factoring company the job of pursuing payment from your customer. They will likely be in contact with the customer, and some companies have very aggressive collection policies. In these cases, fast funding may have a high cost.
It may confuse your client to be contacted by another company about an invoice they have with your business. And it can impact your reputation. Whatever happens between the factor and your customer will reflect on your business. You don’t have any control over this.
In addition, factoring is associated with cash flow problems. Some customers won’t care about this. Others will. Many businesses—especially startups and small businesses—will have cash flow challenges even though they’re doing well. Delays between having to pay your expenses and getting paid by customers happen to the best companies. Ideally, your customers will understand this. (They may be in the same situation themselves! In February of 2020, more than half of small business owners polled said that late payments were having a negative impact on their cash flow.)
Read reviews and ratings about the factoring company before you sign up with them. If there are instances where they’ve negatively impacted relationships between businesses and their customers make sure to steer clear.
For companies that conduct the majority of their assessment over the phone, be aware that they may have a clause in their contract that covers everything discussed orally. This means that minimums, fees, and termination clauses (among other things) that have been discussed only and not put into writing are legally binding.
This isn’t something that every factoring company does, and obviously, any company that conducts business exclusively online won’t have this issue. But it’s good to be aware of.
Another thing to watch for is the term ‘Agreement’. In most cases, agreements are actually contracts, and will be adhered to as such. If there is anything you don’t understand, be sure to seek clarity before you sign any agreement or contract.
Invoice factoring is best seen as a short-term solution. For every invoice you factor, you don’t receive the full value of the invoice. The fees that factors charge, plus a portion of each invoice’s value goes to the factor. In the long run, this can have an impact on your balance sheets.
On the other hand, if you have clients that take a long time to pay, or your investing valuable time and energy trying to collect on late invoices, factoring can be a great solution. You get paid promptly, and you can focus on running your business, not chasing payments.
The best-known factoring companies include Triumph Business Capital, Altline, and Bluevine
This is fantastic! When your cash flow needs no longer require assistance through factoring, there may be a process involved in closing the factoring contract, and rerouting those customer invoices back to your own accounts receivable.
Reputable factoring companies will have a clear process in place for you to follow. But there are some companies that will leave it entirely up to you. In these cases, you’ll have to forward the factoring company’s release letter to each customer who was previously working through the factoring company to pay your invoices.
Most factoring companies are looking to build long-term relationships, and their reputation is important to them. Follow up on any questions and concerns, and (again) read everything over very carefully before you sign that contract.