A Complete Guide to Invoice Factoring

The Easiest Way for Today’s Businesses to Solve Their Cash Flow Problems

Invoice Factoring is a convenient, fast, flexible, and accessible financing solution available to both fully-established businesses and start-ups. It’s a cost-effective and efficient way to raise capital without taking on additional debt. In this guide, you’ll learn everything you need to know about factoring, including:

  • What invoice factoring is and how it works

  • Who uses factoring
  • When you should factor your invoices
  • The benefits of factoring
  • How invoice factoring is different from other financing options
  • How to find the right factoring company
  • And much, much more!

The best way to ensure that your overall experience with factoring is as convenient and profitable as possible is to educate yourself on the ins and outs of the entire process and everyone involved in it. That way, you know that your business is getting the cash flow it needs to operate and grow and that you have partnered with a factoring company that you can trust to help you reach your financial goals.

Once you make it to the end of this comprehensive guide, you’ll have all the information and knowledge you need to make informed decisions about everything from the factoring company you choose to the type of factoring that would benefit your business most.

In This Guide

Invoice Factoring is a convenient, fast, flexible, and accessible financing solution available to both fully-established businesses and start-ups. It’s a cost-effective and efficient way to raise capital without taking on additional debt. In this guide, you’ll learn everything you need to know about factoring, including:

Executive Summary

Invoice factoring is one of the easiest and most popular ways for companies of all sizes to improve their financial standing – and fast! Also referred to as accounts receivable factoring or invoice financing, this alternative financing solution pays companies upfront for money already owed to them – the money tied up in their AR processes. 

So what is factoring? Factoring is a financing solution that fills the cash flow gap left by slow-paying clients by giving companies an upfront and immediate advance on their invoice payments. It is one of the fastest, easiest, and most affordable ways for companies to obtain the financing they need to cover important business expenses like payroll, business expansion, and other operating expenses. Companies can speed up their cash flow without having to wait up to 90 days (or longer) for their customers to pay them. Plus, because factoring is not a loan, it is debt-free. Receivables financing can be a game-changer for businesses that need quick access to working capital.

Factoring Overview

If you’re looking for a definition of invoice factoring, it’s “the purchase of accounts receivable at a discount.” It is a tried-and-tested funding solution, especially for growing businesses, and has been for centuries. 

In fact, the principle of factoring can be traced back to the Mesopotamian Era (around the 18th Century BC). The sixth Babylonian King, Hammurabi, set down a code of laws known as the Code of Hammurabi, a part of which laid out rules for merchants who wanted to use factoring as a form of funding. The process evolved throughout history, even being used by merchants in ancient Rome that used agents known as “factors” to secure trade credits. 

Eventually, in the 1300s, the modern form of invoice factoring began to take shape. Throughout Europe, various historical events gave rise to the use of factoring among different merchant groups. During the 1300s and 1400s, Jews fleeing persecution in Spain sought refuge in Italy and, restricted from owning land, became involved in local grain commerce. They started charging a fee for the use of cash and eventually began offering high-risk loans to farmers against the crops in their fields. This service evolved to include advancing money for the delivery and payment of grain exported overseas. In England, clothing merchants also began utilizing factoring as a means of financing.

Factoring has evolved into a fast-paced and sophisticated B2B financial service, but the core idea remains the same: a third party purchases a company’s invoices at a discount to enable the company to operate and raise capital for growth. The factoring firm advances most of the invoice value, collects payment on the company’s behalf, and then repays the balance once the customer has paid in full, minus a small fee. 

Some factoring firms also provide added back-office services such as handling invoicing and collections and even offer industry-specific benefits. To qualify, you don’t need extensive collateral or assets, a high credit score, or a long business history. Factoring professionals evaluate applicants based on their customers’ creditworthiness. Unlike bank loans, funds from factoring are unrestricted and grow with invoices, and most companies provide access to funds within 24-48 hours.

What Is the Invoice Factoring Process?

If you need a quick injection of working capital for your business, investigating factoring may be your best option. Smaller, less-established businesses can qualify, the turnaround time is substantially faster than a bank loan, and it does not negatively affect your credit rating like a loan would. 

There are four main components that make up the invoice factoring process:

  • Your business
  • Your clients (debtors) 
  • One or more outstanding invoices

  • The factoring company (factor)

The invoice factoring process involves selling control of your accounts receivable to the factor, either in part or in full, and it works like this:

  • You provide goods or services to your customers and invoice them as you usually would
  • You “sell” your open invoices to a factoring company which, after verifying that the invoices are valid, will pay you out a bulk percentage of their value. This is typically between 80% and 90% and is known as the advance rate. The percentage that is held by the factoring company is known as the reserve and will be paid back once the process is complete. 
  • The factoring company will notify your customers that they will now be in control of the collections, and your customers will make the necessary payments directly to the factoring company. If necessary, the factoring company will chase late payments. 
  • Once all of your customers have paid the money they owe, the invoice factoring company will reimburse you the remaining invoice amount (reserve) minus their small factoring fee.

Who Can Use Invoice Factoring?

Factoring is one of the easiest forms of funding to qualify for, which is why so many businesses from a variety of industries rely so heavily on it. From start-ups to fully established corporations, any business that sells a product or service to customers but usually waits for 30, 60, or 90 days (or more) for their customers to pay them can benefit from invoice factoring. 

Businesses in the following industries improve their cash flow with invoice factoring every day:

Is Factoring Necessary for Your Business?

How do you know if your business needs invoice factoring? There are a few factors to consider, but first, think about these questions:

  • Are you delivering your products and services on time but facing significant delays when it comes to getting paid?

  • Is it difficult to manage your day-to-day operating expenses while you’re waiting for payments?
  • Do you have a limited cash reserve for payroll and other monthly business expenses? 

  • Is a shortage of personnel causing you to delay invoicing your customers and making collection calls?
  • Are you struggling to maintain a positive cash flow? 
  • Are you delaying paying your suppliers and other bills because you’re waiting for payments from your clients? 
  • Are you finding it challenging to implement expansion or growth plans due to limited funds?
  • Do you have no choice but to turn down new business opportunities due to a cash flow shortfall?

If you answered “yes” to any of these questions, invoice factoring could go a long way in solving your cash flow problems. Instead of waiting for late-paying customers to finally pay you, you get paid in advance – giving you the cash flow and financial freedom you need to cover your expenses, hire new staff, expand your business, and even start saving.

What Are the Benefits of Invoice Factoring?

  • Improved Cash Flow: Factoring your invoices will give you immediate access to critical funds, helping improve your financial stability. 
  • Reduced Debt: With your invoices being paid up front, you have cash on hand to cover your urgent expenses, eliminating the need for a traditional loan. This reduces your debt and preserves your credit score. 
  • Improved Credit Standing: Factoring is not a loan, so it doesn’t appear on your credit report as debt. Plus, with immediate cash flow to pay your expenses, you improve your credit standing and build a positive credit history, making it easier for you to access funding in the future (should you need it). 
  • Predictable Cash Flow: The advance rate will be outlined in your factoring agreement, so you know exactly how much money you will be getting when you submit your invoices for factoring. This predictable source of cash flow allows you to plan better for the future. 

  • Time-Savings: With the factoring company handling things like invoicing, collections, reporting, credit checks, and your AR management, you have more time to focus on your core operations and can even redistribute your existing staff to areas of your business where they are needed more. 
  • Flexibility: While some factoring companies require you to factor a minimum number of invoices, there are many more that will allow you to factor as many or as few invoices as you would like. This makes factoring a flexible source of funding that grows with the business.
  • No Collateral Required: Invoice factoring typically does not require any collateral, making it an accessible source of funding for businesses of all sizes and types.

In short, factoring can be extremely beneficial. It supports your business growth, protects your business from debt, helps you improve your financial planning, saves you time and money, and keeps your collateral safe.

Why is Factoring Popular Among Small Businesses?

Traditionally, factoring was a funding option utilized mainly by large corporations. But today, an increasing number of small and medium-sized enterprises are opting for factoring companies and their tailored cash flow solutions. Converting invoices into quick cash is a favored method of financing for many companies.

Invoice Factoring Compared to a Bank Loan

The difference between invoice factoring and a bank loan is often a topic of interest. Those unfamiliar with the concept of factoring may be concerned about the costs or hidden terms of the service; however, when compared to a bank loan, there are a number of ways in which factoring comes out on top. Factoring is not the same as borrowing from a bank. The application process is a lot faster (and less stringent), and it’s debt-free. You are simply getting an advance on money already owed to you instead of taking out a loan based on uncertain future earnings.

Factoring has several advantages over bank loans, such as:

  • No debt incurred
  • No need for collateral
  • No strong credit history required, so even smaller businesses can apply
  • Approval process is quicker and requires much less paperwork
  • Your application is approved based on your customers’ creditworthiness, not your personal assets or payment history.
  • The setup process with a factoring company is typically faster compared to obtaining a bank loan.
  • Factoring fees are a lot more affordable than the interest charged on bank loans

Here are a few instances where invoice factoring is the preferred option compared to a bank loan:

  • If your business is a start-up: While factoring is available to almost all B2B companies, new businesses benefit from the service the most. As a start-up, you’re likely still trying to establish equity and a strong credit record for your business. This will prevent you from getting a bank loan, but for invoice factoring, it isn’t a problem. 
  • Your customers are taking way too long to pay you: After you invoice your clients, you’re more than likely looking at waiting at least a few weeks before you see a payment. However, your fixed expenses can’t wait with you. A bank loan involves an intensive, time-consuming application process and an even longer wait for your loan to eventually be paid out. Factoring, on the other hand, will give you the money you need without the delay. 
  • Too much time is going into collections: Staying competitive is becoming more and more difficult for businesses, so every resource needs to be utilized as efficiently as possible, including your time. Preparing, checking, mailing invoices, and then needing to follow up on outstanding payments wastes valuable hours that your staff could be using more productively. By factoring your invoices, these time-intensive tasks will be taken care of, and you can get back to running your business. This is the kind of support you won’t get with a bank loan. 

  • Factoring allows you to save with volume discounts, added benefits, and early payment discounts: If your suppliers offer discounts for bulk purchases or for settling your account early, waiting for invoice payments from your customers can hold you back from these cost savings. However, factoring will give you immediate cash flow so you can take full advantage of the discounts offered by your suppliers. This will save you money and improve your credit score. On the other hand, borrowing from a bank to fund these purchases may not provide the same benefits. On top of that, depending on your industry, some factoring companies offer additional financing services, such as fuel cards, which save trucking companies a lot of money at the pumps and on fleet maintenance or tires.

Debunking Common Myths About Factoring

We already know that factoring has been used for thousands of years, but the concept of invoice factoring for small businesses has really gained popularity over the past two or three decades. Despite the fact that a growing number of industries and businesses are taking advantage of this service, there are still a few misconceptions.

While we’re on the subject of how factoring companies are better than traditional lenders, we should debunk some common myths that hold people back from trying invoice factoring.

Myth 1: Companies Only Use Factoring as a Last Resort

Contrary to popular belief, many thriving businesses use factoring to improve their cash flow, not just those in financial trouble. They choose to receive payment for completed work sooner rather than later, using the funds that have been sitting in their accounts receivable for months. This appeals to all business owners, not just those facing financial challenges.

Myth 2: Factoring Companies Are Lenders

Factoring companies are different from traditional lenders, such as merchant cash advance (MCA) providers, payday loan companies, or banks. They do not lend money that needs to be repaid. Instead, they provide prompt payment for work already completed, allowing you to receive payment for what you are owed without incurring debt.

Myth 3: Factoring Companies Are Collections Agencies

Factoring companies provide you with payment for what you are owed and assist with collections, but they offer much more than just collection services. Factoring clients can also access valuable services such as invoice preparation and processing, payroll management for staffing agencies, and fuel cards with discounts for trucking companies. It is also important to note that, unlike a collections agency, factoring companies do not chase delinquent accounts. While they will attempt to collect past-due invoices from your customers, their entire service revolves around obtaining payments from your creditworthy clients. If you have delinquent clients with invoices that are more than 90 days overdue, it is likely that those invoices will not be approved for factoring.

Myth 4: Using a Factoring Service will Damage Your Customer Relationships

While collections agencies have a reputation for harsh collection practices, factoring companies are completely different, and your clients will likely already be familiar with the concept. When you start your factoring journey, the factor will have a friendly and professional team that will contact your clients and notify them that they will be handling the collections, and all their collections efforts will be conducted with the same level of professionalism and friendliness. Plus, you can even improve your customer relationships because, with a strong business cash flow thanks to factoring, you will be able to extend selected clients more flexible payment terms. For example, if you are competing with another company for someone’s business, you could offer better payment terms to the customer in order to seal the deal. 

Understanding the Factoring Agreement

When you use invoice factoring, you will be required to sign a factoring agreement – a legally binding contract between your business and the factor that outlines the terms and conditions of the factoring arrangement. This includes the volume of invoices to be factored, the advance rate, factoring fees, payment terms, and more. It is very important to read through the agreement thoroughly and ensure you understand it completely before you sign. 

Carefully reviewing the factoring agreement will ensure that you understand your obligations (as well as those of the factoring company), avoid misunderstandings, and identify any hidden fees. Plus, the agreement will outline any provisions that your company is expected to comply with, such as reporting requirements, maintaining accurate records, or confidentiality provisions. In short, by carefully reviewing the factoring agreement, you can ensure that your business’s interests are protected and that the factoring arrangement is successful.

Common Terms and Fees in a Factoring Agreement

  • Origination Fee: Some factors require an upfront fee that small businesses need to pay when they receive their money. This is typically a small percentage, but the money you receive from the factoring agreement should offset the fee. 
  • Termination Fee: This fee is usually paid to the factor if you decide to end your factoring agreement, and the amount differs depending on the factoring company and the terms of your factoring agreement. 
  • Monthly and Weekly Fees: Some factoring companies will charge maintenance fees on your contract, which are charged either weekly or monthly. These fees vary from factor to factor, with some contracts offering different percentages over different periods. For example, some factors may charge you a smaller percentage weekly than taking a larger percentage monthly. 

  • Customer Limits & Credit Facilities: Your factoring agreement will outline the overall credit line the factoring company is willing to advance you. However, the factor won’t want to tie up most of that amount in invoices from one customer, so the customer limit outlines the percentage of the credit line which can come from one customer’s invoice. 

  • Notice of Assignment (NOA): This document is a requirement for most factoring companies. It is an official document that is used to inform your customers that their invoices have been assigned to a factoring company. NOAs are important in the factoring process to ensure that the customer is aware of the change in ownership of invoices and that their obligations to pay them remain unchanged.

  • Non-approved Accounts and Disputes: Before you can factor an invoice, the factoring company must approve the customer tied to that invoice. This is done through credit checks and risk assessment. Factors have the right, via contracts, to turn invoice accounts into non-approved accounts. If there are disputes between the small business, the factor, and the customer, most factoring agreements allow a certain amount of time for settlement before the account becomes non-approved.

The Cost of Invoice Factoring

When it comes to determining how much invoice factoring will cost, there are three main points to consider.

  • Factoring Rate: Also referred to as the Factoring Fee, this is the amount charged by the factoring company for their service. It is expressed as a percentage of the invoiced amount (typically between 1% and 5%) and varies depending on factors such as client creditworthiness and the industry your business operates in. 
  • Advance Rate: This is the percentage of the invoice value that is paid to your business upfront. This value is also dependent on a number of factors, but the typical advance rate sits between 70% to 85%. It is important to look for the advance rate in your factoring agreement before you sign because some factors will offer less, and others will offer as much as 95% of the invoice value upfront.  
  • Reserve Rate: This reflects the percentage of the invoice value that the factor holds back as surety in case of fraud or one of your clients defaulting on their payments. The reserve is reimbursed to your business (minus the factoring fee) once your customers have settled their invoices.

Flat Rate vs. Tiered Rates

The majority of factoring companies will use a tiered rate structure for their services, which allows them to link the cost of financing to the period of time the invoices are outstanding. 

With a tiered rate structure, the cost of financing will increase the longer the invoices remain unpaid. 

With a flat rate structure, the factoring rates are represented as a fixed fee, regardless of how long it takes for your customers to pay their invoices. 

This is usually the preferred method for businesses, but you may need to do some research into which factoring companies will offer this rate structure. Factoring companies may use flat rates when your customers have predictable payment schedules.

What Determines the Factoring Rate?

The factoring rate is determined by several factors, including the creditworthiness of your clients, the industry your business operates in, the volume of invoices, and the length of the factoring agreement. The risk assessment made by the factoring company is a key factor in determining the factoring rate because it impacts the advance and reserve rates you can expect.

How Does a Factoring Company Determine Risk?

Each factor will evaluate risk differently, with some being more open to specific factors than others. Generally speaking, the three main points a factoring company will look at when determining risk include:

  • Your Industry: Some industries (transportation, staffing, and consulting, for example) are seen as a lower risk than others and, therefore, often get better terms. Industries that are seen as riskier, or that may require specialized knowledge from the factor, will often get higher rates. This could include the construction industry and third-party healthcare providers. 
  • How Creditworthy Your Clients Are: The creditworthiness of your clients is used more to determine whether you will be approved than your factoring rate. How creditworthy your clients are also plays a role in the size of your factoring line (how much you get funded) and your advance percentage. 
  • How Stable Your Business Is: While the age or credit history of your business won’t prevent you from getting approved for invoice factoring, these factors are considered when determining your factoring rate. Companies with a longer, more stable credit history may get lower factoring rates, while newer companies, or companies with heavily fluctuating sales, may face higher rates.

Recourse vs. Non-Recourse Factoring

When we look at the two types of factoring, we are referring to who will assume the risk if a customer doesn’t pay what they owe.

The most common type of factoring is a recourse agreement, but there are companies that offer both options to their clients. Some may even offer a modified version of recourse factoring to make their services more attractive.

What Is Recourse Factoring?

This is by far the most common type of factoring and basically means that your company will need to buy back any invoices that the factoring company is unable to collect payment on. In this situation, the liability for non-payment is on your business, which is why it is the most common service option offered by factoring companies.

The factor is required to make every effort to collect payment from your customer on your behalf; however, if they are unsuccessful, you will need to repay the funds that are currently owed and attempt to collect the customer payment yourself. If you are unable to collect from your customers, you must accept the loss.

It will be specified in the factoring agreement how many days after the due date for payment you must refund the advance. Regardless of whether you are required to repay the advance or not, you will still be held liable for the factoring fee and any interest. Still, recourse factoring is typically less expensive than non-recourse factoring and may have fewer requirements regarding the small business’s customers and systems.

What Is Non-recourse factoring?

Non-recourse factoring agreements are less common because the risk of non-payment is assumed by the factoring company. So, if your customers default, the factor will not require you to pay them back. 

However, it is important to note that non-recourse factoring does not protect your business from all risks and usually comes with strict conditions such as credit limits, concentration restrictions, and other criteria. In most cases, the factoring company will only assume the risk in very specific circumstances, for example, if your debtor declares bankruptcy. Plus, if your debtors have bad credit histories, their invoices may not even be eligible for non-recourse factoring. 

Non-recourse factoring agreements typically include a higher (often much higher) factoring fee, so to determine whether the cost is worth it, you will need to clearly understand the stipulations and conditions of your factoring agreement.

What Is Modified Recourse Factoring?

Modified recourse factoring combines elements of both recourse and non-recourse factoring. With this option, the factor will have credit insurance/ receivables insurance in place and will therefore be able to offer you protection if your debtors are unable to pay their invoices due to bankruptcy. However, the factoring company usually only accepts the risk up to a certain point. For example, the factor may have a 60-day deadline for your client filing bankruptcy. So, if your customer files for bankruptcy within 60 days of the invoice due date, the factor will assume the risk; however, if they file for bankruptcy after the deadline, then the risk is on you, and you will have to repay your advance to the factoring company. 

Again, the specifics will all depend on the factoring company you choose. With some factoring companies, if your customer refuses to pay for another reason, like a service or quality issue, then you will either be held liable for the invoice, or the factoring company may give you the option to exchange the invoice for another one of the same value.

5 Signs Your Business Needs Invoice Factoring

  • You Can’t Afford to Wait for Slow-Paying Clients to Settle their Invoices – Every business knows the pain of having to wait for 30, 60, 90 days, or more for their clients to pay. Unfortunately, these slow payment turnaround times can put a lot of pressure on your business. With invoice factoring, the wait is eliminated. You get the money that is owed to you upfront, usually within two business days of your paperwork being approved. 
  • You’re Taking on Debt to Cover Your Business Expenses – The cash flow issues that slow-paying clients introduce mean that many companies turn to loans or other lines of credit in order to pay their suppliers and cover their existing expenses. This starts a cycle of expensive, credit-damaging debt that can be hard to get out of. Merchant cash advances (MCAs), for example, may be fast, but their fees and interest rates can take a big chunk out of your profit margin. Factoring fees, in comparison, are much lower. Plus, invoice factoring is debt free, so you won’t be damaging your credit, but you will still have the money to cover your expenses, which actually helps your credit. 
  • You Want to Offer Potential Clients More Flexible Payment Terms – Picture this, your services and those of a competitor are tightly matched, but you know that offering a potential client a more flexible payment term could help seal the deal and drive their business your way. The problem is, you don’t have enough free cash flow to do this without affecting your bottom line. Factoring can solve this problem. As you won’t be waiting for your other clients to pay you, you will have the financial freedom to take on new clients and offer them longer payment cycles if need be. This is also a useful tool for customer retention. 
  • You’re Putting Off Expansion Due to Limited Working Capital – If waiting on slow-paying clients is hindering your business growth, your company isn’t reaching its full potential. Having instant access to the cash that you have earned through your sales allows you to invest in your business and reach your goals. Whether it’s hiring new sales staff to bring in more business or expanding your operations, having the necessary funds is crucial. Factoring companies can provide the financial support you need to achieve growth and success.
  • Other Ways Invoice Factoring Can Help Your Business – The instant working capital you get from invoice factoring can also help your business if:

  • You need to pay your suppliers before you can start on a big project

  • You would like to expand your inventory
  • You’re struggling to cover payroll 
  • You need extra money for new equipment, for equipment maintenance, or for other general office expenses.

Growing a business is not an easy task and is bound to have its ups and downs. As your company expands, new challenges arise, such as increased inventory and payroll costs. To sustain your business growth, you often need to spend money to make it. This is why there is no shame in utilizing financing options, like factoring, to give you the extra support you need to navigate your growth challenges.

What to Look for When Choosing a Factoring Company

Whether you’re looking for a financial solution to help you manage your cash flow, increase your working capital, or simply reduce the stress of your accounts receivables processes, choosing the right factoring company goes a long way in the overall success of the arrangement. Here are 6 points to consider when choosing a factoring company.

  • Experience and Expertise: It is important to look into how long the factoring company you are considering has been in business. Older factors tend to have a more solid track record of helping clients succeed, will have better stability (there is less risk for you), and will generally be better equipped to meet your financing needs no matter how large they are. Plus, if you find a factoring company with industry-specific experience, you know that they know exactly how your industry works, what trends to look out for, and how to handle your clients. Plus, they will have the expertise and resources necessary to develop value-added solutions that could benefit your company. 
  • Customer Service: Exceptional customer service is one of the biggest factors that differentiate good factors from bad ones. Look at how responsive they are to your questions, how they handle your communications, and how quickly they answer you and pay out your advances. This will not only benefit your business but will give you a good idea of how the factoring company will handle interactions with your clients, which is essential in maintaining good customer relationships. Well-established factoring companies often provide their clients with a single point of contact and a dedicated account manager that has been trained to help you in the best way possible. 
  • Flexibility: Is the factoring company established enough to offer you flexible factoring terms? Can their services be adapted to meet the unique needs of your business and industry? Is there a minimum volume of invoices, or can you submit as many or as few invoices as you choose? Are you required to factor all your invoices, or can you pick and choose which ones you want to factor? There are a lot of factoring companies that prioritize flexibility and customized service, so if the company you’re looking at does not, then it is best to keep looking. 
  • The Cost: As we have covered in this guide, factoring may be affordable, but it is not free. The factoring rates and fees will, however, differ from factor to factor. It is a good practice to get a few quotes and compare the best options. You should also check if the factoring company has a cap on its financing. The last thing you want is to partner with a factoring company that’s funding doesn’t grow as your business does. 
  • The Terms of Your Factoring Agreement: Reading your factoring agreement thoroughly is one of the most important steps in finding the right factor. You need to be sure that there aren’t any hidden fees or disadvantageous terms that could turn your good financial decision into a bad one. 
  • Payment Terms: Check the payment terms offered by each company, including the time it takes to receive payment after invoicing and any penalties for late payment.
  • Credit and Risk Assessment: Consider the credit and risk assessment process of each factoring company. Make sure you understand the criteria used to evaluate your invoices and customers.
  • Their Reputation: Do some research and try to find reviews about the factoring company you are considering. Check online reviews and testimonials from previous clients to see their experience with the company. Look for a company with a good reputation for honesty, reliability, and integrity. This will help you determine if the factoring company is a good fit for your business.

6 Questions to Ask Before You Start Factoring Your Invoices

Not all factoring companies are created equal. Some specialize in different industries to offer a more customized service, while others don’t limit their services by industry to cater to a wider audience. Some will offer higher fees with longer repayment terms, while others will offer the converse. All the considerations, from the factoring rates to the advances and contract length, will differ depending on the company you choose. To ensure you get the best partnership, it’s crucial to ask the right questions and do your due diligence. Here are 6 questions you should ask before settling on a factoring company.

  • What do the fees look like? Ask about the fee structure, including any flat/ tiered factoring rates, transfer fees, termination costs, and collection costs.
  • What is the contract length? Find out the duration of the contract and whether the company is open to negotiation for a shorter period.
  • Does the factor offer any additional services? Determine what services the company provides beyond factoring, such as back-office work support. These value-added benefits can make a big difference in your factoring experience. 
  • How long has the factoring company been in business? Look for a well-established factoring company with a proven track record of success over time.
  • Does the factoring company know how your industry works? Choose a company that has a deep understanding of your industry, as this can greatly impact their ability to support your business.
  • Is there a minimum invoice volume you are required to factor? Some factoring companies will have a minimum volume of invoices you need to submit, while others offer more flexible terms. Be sure to find out if you can choose which invoices you will be factoring as well, or if the factor will require you to submit all of your accounts receivables.

Growing Businesses Need Flexible Alternative Funding

Small and medium-sized businesses need financing options that can grow as they do. This means that as your client base grows, your line of credit needs to be able to expand to meet the growing demand. This is why choosing an established factoring company is so important. Unlike a traditional loan with a fixed limit, factoring is known for being a flexible financing option.

Your Business Won’t Need to Wait to Make Important Purchases

A stable cash flow is necessary for making crucial purchases for your business, such as equipment, vehicles, or other capital investments. Factoring helps to keep your cash flow positive by freeing up funds that would otherwise be tied up in aging accounts receivable. This is especially important for small and medium-sized businesses.

Extended Payment Terms

In today’s business world, customers often take advantage when it comes to payment terms, stretching their payment due dates to 60, 75, or even 90 days. This can be a challenge for companies with fixed expenses. Factoring provides a solution by converting the money tied up in your AR processes into fast cash, allowing you to take on business without having to worry about the potential customer’s payment terms.


This overview of invoice factoring and how it works is a great starting point in figuring out if this service would be a good fit for your business. If you’re ready to take the next step in finding the right debt-free financing solution to help improve your cash flow, request a factoring rate quote today, and we will connect you with a reputable and experienced factoring company. Our respected factors specialize in your industry and will be able to answer any questions you have and help you get on the path to sustaining and growing your business as soon as possible. Again, if you’re having trouble finding the right factoring company, we will help you explore industry-specific factoring companies from throughout Canada that can serve your business needs. Start working towards a brighter financial future today!

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