What is Invoice Factoring?
Invoice factoring, also known as accounts receivable factoring, is a business financing strategy in which a company sells unpaid invoices for an immediate cash advance. Businesses often wait weeks or months before receiving payment. Invoice factoring allows them to access that capital sooner, which is particularly beneficial for those businesses with slow-paying customers.
Most companies use invoice factoring as a short-term financing solution to address immediate cash flow needs, such as payroll or rent. Factoring isn’t a loan, and the business doesn’t incur any debt.
When a business factors accounts receivable, it receives a cash advance for the partial value of the invoice. Factoring involves working with a third-party financing institution, commonly referred to as a factoring company or factor, which purchases the invoices and advances the cash.
After selling the invoices, the factoring company assumes ownership of the invoice and handles collecting from the business’s customers. Once the customers pay their invoices, the factoring company releases the remaining amount minus its fees.
Businesses from various industries utilize accounts receivable (A/R) factoring to receive payment early on outstanding invoices. Some of the most common industries include trucking companies, wholesalers, suppliers, shipping companies, and more. Non-recourse factoring costs more than recourse factoring, as the factor assumes the risk of non-payment.
What is a Factoring Rate?
The factoring rate is the fee a business pays for the factoring service, which is how the factoring company generates its revenue. You may sometimes see the factoring rate referred to as a factor rate or discount rate. Invoice factoring rates typically range from 1% to 5% of the invoice value per month.
Any business considering invoice factoring must understand how factoring rates work to estimate its costs accurately. You can think of the factor rates as a sales discount, which is why it’s also called the discount rate.
Let’s say a company wants to factor accounts receivable totaling $25,000 and has a factor rate of 2%. In this case, the business sells unpaid invoices worth $25,000 at a discounted rate of $24,500. The $500 is the money the factoring company makes.
Now, it is unlikely that a business gets the entire $24,500 in cash. The actual amount it receives depends on the advance rate. In addition to the discount rate, service fees may be charged by factoring companies for processing services. Higher-risk companies tend to have higher factoring rates due to the increased risk of non-payment.
What is an Advance Rate?
In invoice factoring, the advance rate is the percentage of the invoice’s value that the company receives in a cash advance. The advance rate offered by factoring companies can range from 80% to 100% of the invoice value, affecting the total costs.
Continuing the example from above, a business factored $25,000 in receivables at a 2% discount rate, resulting in a total of $24,500. Let’s say the advance rate is 90% – the business’s cash advance is 90% of the $24,500, which works out to $22,050.
The remaining amount is deposited into a reserve account until your customers settle their invoices with the factoring company. Once they pay, the company releases the reserve minus any additional fees.
The two most important numbers to know in invoice factoring are the factor rate, which is how much it costs, and the advance rate, which is how much you receive. The whole point of factoring is to turn the money a client owes you into immediate working capital, so you want as high an advance rate as possible.
What is an Invoice Factoring Company?
An invoice factoring company is a financing institution that purchases invoices at a discounted rate in exchange for providing upfront cash. The factoring company then becomes responsible for collecting the invoice amount.
In some ways, the factoring company acts as a business’s back-office accounts receivable. Here are some of the key differences between different invoice factoring companies.
Invoice Factoring Fees
The first thing to consider is the cost. Invoice factoring will always be an expensive way to secure financing, but some companies are far more costly than others. You want to ensure that you can afford the fees and that the cost of the funding is worthwhile for your business. Begin by researching the fees that the factoring company charges for its services. Researching multiple options can help you find the cost of invoice factoring.
Recourse vs. Non-Recourse
Recourse factoring means your company is liable if your customers default on their invoices. Each agreement specifies the timeframe during which customers must pay before it becomes a bad debt invoice (i.e., past due for 3 months, 6 months, etc.). When an invoice exceeds its final due date, the company must repurchase the invoice. At this point, the business can attempt to recoup its losses through collections, as it now owns the debt again. However, in most cases, it just becomes a loss.
With non-recourse factoring, you don’t have to pay if your customers default for a specified reason. Some non-recourse agreements only apply if the client defaulted due to bankruptcy. Other non-recourse agreements extend beyond bankruptcy but remain stringent regarding the circumstances under which non-recourse applies. Non-recourse factoring is more expensive, but the added protection may make it worthwhile.
Notification Factoring
Some factoring companies will notify your customers when they purchase the invoices, and others will not. If you don’t want your customers alerted when you sell their invoices, look for a company that doesn’t notify them.
Additional Services
Some invoice factoring companies stand out because they offer enhanced services to help you process invoices. Some additional services to consider when looking for a factoring company include:
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Easy invoice uploads.
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Integration with your accounting software.
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Credit checks on your customers.
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A/R processing tools.
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Online portals or mobile apps for convenient processing.
What rates do the Best Invoice Factoring Companies offer?
Comparing factor rates can be a bit tricky. Most companies publish their average factoring rates, but you won’t find out your actual rate until you apply. Established businesses with reliable customers typically receive the best invoice factoring rates.
A factoring rate is the advertised fee for funding, while the total factoring cost includes all fees associated with the transaction. Hidden fees are often added to the base transaction fee, which can impact the total cost of factoring.
Also, keep in mind that the advance rate is important as well. We include the factoring rates, advance rates, and minimum qualifications for the best factoring companies to help you compare them. You want to understand the costs and benefits when finding the best invoice factoring company for your business.
altLINE
Rates:
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Advance Rate: 85%-95%
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Discount rate: 0.75% – 5%
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Funding time: 24 hours to 3 days.
Qualifications:
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Time in business: N/A
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Minimum revenue: $15k.
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Minimum credit score: N/A
AltLINE is the invoice factoring wing of The Southern Bank Company, based in Alabama. Since the community bank funds altLINE’s invoice factoring, it can maintain competitive rates.
The factoring company’s advance rates range from 85% to 90%, and their discount rates start at 0.5%. The discount rate caps out at 5% if customers take longer than 30 days to pay their invoices.
altLINE does not offer invoice factoring to trucking or freight companies, which is uncommon in the invoice factoring industry. It does provide excellent rates for all other sectors, though.
Riviera Finance
Rates:
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Advance Rate: up to 95%
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Discount rate: starts at 2%
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Funding time: 24 hours
Qualifications:
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Time in business: N/A
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Minimum revenue: N/A
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Minimum credit score: N/A
Riviera Finance offers non-recourse factoring, and it is one of the longest-running factoring companies available. The company’s unique credit guarantee distinguishes it from other factoring companies.
The company’s credit management service guarantees credit on all invoices, so Riviera Finance assumes the risk as the credit manager. Companies factoring invoices through Riviera gain peace of mind knowing they are not responsible if a customer fails to pay their invoice.
Riviera Finance offers a convenient online portal with 24/7 access to your invoice information. The company uses integrated tools to provide support as an accounts receivables partner.
It’s also a good option for businesses that need funds quickly. Once approved, the company provides funding for invoices within 24 hours. Advance rates go up to 95%.
eCapital
Rates:
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Advance Rate: up to 100%
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Discount rate: Starts at 1%
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Funding time: Same day to 48 hours
Qualifications:
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Time in business: N/A
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Minimum revenue: N/A
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Minimum credit score: N/A
eCapital Commercial Finance offers a range of business financing products, including invoice factoring. The company is ideal for startups and younger businesses, as it doesn’t have minimum requirements that would typically exclude these businesses.
The factoring company offers advance rates of up to 100%, one of the best in the industry. Discount rates range from 1% to 5%, and they currently offer a 90-day trial period.
eCapital offers both recourse and non-recourse invoice factoring. The company offers some of the fastest funding times in the industry, with same-day funding available in select cases.
Invoice factoring customers gain access to eCapital’s database of over 40,000 companies and can run unlimited credit checks. The tool allows small business owners to run credit checks on their customers before factoring their invoices.
Triumph Business Capital
Rates:
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Advance Rate: Up to 100%
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Discount rate: 1%-4%
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Funding time: 24-48 hours
Qualifications:
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Time in business: N/A
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Minimum revenue: N/A
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Minimum credit score: 500
Triumph Business Capital specializes in invoice factoring for trucking and freight companies. The trucking industry utilizes invoice factoring more than any other industry.
Triumph Business Capital offers additional incentives like a fuel card program, insurance, and equipment financing. The company also offers invoice factoring to businesses in the staffing, oil, gas, manufacturing, telecommunications, and service sectors.
Triumph’s discount rates range from 1% to 4%, and it offers a 100% advance rate with no reserves. It offers both recourse and non-recourse financing.
In some cases, it’s possible to receive same day business loans. Complete the online application or call Triumph Business Capital to apply.
RTS Financial
Rates:
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Advance Rate: up to 97% of invoice value paid upfront.
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Discount rate: Undisclosed
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Funding time: 24 hours
Qualifications:
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Time in business: N/A
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Minimum revenue: N/A
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Minimum credit score: N/A
RTS Financial offers invoice factoring services for various industries, with special incentives tailored to freight businesses. In addition to helping solve cash flow issues, RTS offers a desktop and mobile app to assist trucking businesses in managing their day-to-day operations.
The company offers a fuel card program, like many freight factoring companies. It can provide up to 97% of the invoice’s value and provides quick funding with same-day funds in some cases.
The main drawback of RTS is that it doesn’t provide rates upfront, and you need to apply to discover the applicable fees.
RTS does not charge ACH transfer fees or invoice processing fees.
TCI Business Capital
Rates:
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Advance Rate: 70%, 80%, or 90%
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Discount rate: N/A – varies based on when customers pay
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Funding time: 24 hours
Qualifications:
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Time in business: N/A
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Minimum revenue: $50,000
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Minimum credit score: N/A
TCI Business Capital provides invoice factoring on monthly contracts. You can lower your rate by increasing the volume of invoices you process.
The company mainly provides financing to business-to-business (B2B) companies in the following sectors:
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Environmental Services
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Heavy construction
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Oilfield services
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Manufacturing
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Renewable Energy
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Staffing
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Telecommunications
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Trucking and freight
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Utility and pipeline contractors
TCI offers a fuel card program for trucking businesses. It also offers some personal touches, including the opportunity to speak with a representative to find the best package for your needs.
The company’s fees are volume-based, like many invoice factoring companies. The website doesn’t disclose the exact fee ranges. You must apply to get a quote.
OTR Solutions
Rates:
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Advance Rate: 96%
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Discount rate: 1% – 4%
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Funding time: 24 hours, with instant funding possible.
Qualifications:
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Time in business: N/A
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Minimum revenue: N/A
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Minimum credit score: N/A
OTR Solutions (formerly OTR Capital) is a leading invoice factoring company serving the transportation industry. The company offers additional services, including equipment financing, insurance, fuel cards, and tax assistance.
Complementing their invoice factoring service, OTR offers a convenient online portal to check your customers’ credit. Enter the MC number to find the results you need.
Going along with the online portal, OTR also offers a mobile app. Customers can use the app for uploads, processing data, and adding notes.
OTR does not have monthly minimums, credit restrictions, or volume limits. It offers both recourse and non-recourse factoring.
The company offers a consistent flat factoring rate and doesn’t have hidden charges or fees. OTR offers customized factoring programs to meet a business’s unique needs.
How to apply for Invoice Factoring:
You can apply for invoice factoring through United Capital Source. Follow these instructions to apply for invoice factoring.
Step 1: Make sure your customer is reliable
Factoring invoices only works when your customers pay their invoices on time and in full. Ensure you’re certain your customers will pay before contacting a factoring company.
Step 2: Gather your documentation
When you apply, the factoring company needs to review the following documents:
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Driver’s license
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Voided business check
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Bank statements from the previous three months
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Business tax return
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Accounts receivable aging report, Accounts payable report, and debt schedule
Step 3: Apply
You can complete our one-page application or contact us by phone to apply. Either way, you’ll need to provide the information above and the invoice amount you want to sell.
Step 4: Speak to a representative
Once you apply, one of our representatives will contact you to discuss the factoring fee, factoring rate, and terms associated with the sale. You’ll get an upfront breakdown of all costs, so you don’t have to worry about hidden fees.
Step 5: Receive approval
The entire process takes about two weeks to finalize. Funds will appear in your bank account 1-2 days after completing the application.
What are the advantages of Invoice Factoring?
There are several advantages to factoring receivables. It’s one of the easiest forms of business financing to qualify for, since credit decisions are based more on your customers’ credit than yours.
Receivables factoring isn’t a loan, so you don’t incur any debt. It’s a viable alternative for companies in urgent need of funding that don’t want to add to their debt.
When you factor invoices, the factoring company assumes responsibility for collecting payments from your customers, saving you time and resources. And don’t worry – factoring companies won’t relentlessly pursue your customers, either. When you work with a company like UCS, your customers won’t even know you sold the invoice.
The most significant benefit is turning accounts receivable into working capital. Unpaid invoices are like unsold inventory – the longer they go without converting into cash for your business, the less profitable they become.
What are the disadvantages of Invoice Factoring?
The biggest drawback is that accounts receivable factoring is expensive. Like most near-term and short-term financing options, invoice factoring typically carries higher rates and fees compared to traditional long-term business financing.
Due to the complex nature of receivables factoring, it’s also difficult to compare costs to a loan or other forms of financing. Comparing factoring rates helps with understanding the costs.
While you don’t need good credit for approval, your customers do. If your customers are unreliable and already paying late, you are unlikely to get approved. Receivables factoring is most effective for established businesses with multiple customers or clients.
Factoring accounts receivable is not the only way to avoid late payments and convert invoices into cash. Sometimes, all you need to do is improve billing. You can try automating your invoices, offering customers more payment options, and enhancing your collections team’s efforts.
We prepared a pros and cons list for a quick summary.
Pros & Cons:
Pros:
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Turn unpaid invoices into cash.
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Easier to qualify for than a business loan.
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You can use the funds for various business purposes.
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Invoices and receivables are treated as collateral.
Cons:
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Higher rates & fees than traditional loans.
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Fees are based on the time it takes customers to pay their invoices.
Frequently Asked Questions
Here are some of the most common questions about comparing factoring rates.
What’s the difference between Invoice Factoring & Invoice Financing?
While the two terms sound similar, there are significant differences between them. As discussed, invoice factoring involves selling your unpaid invoices for immediate cash.
On the other hand, invoice financing involves receiving an upfront amount based on the value of your invoices. You then repay the loan as your customers pay their invoices.
In invoice factoring, the factoring company owns the invoices and is responsible for collecting payment from your customers. With invoice financing, you still own the invoices, and you collect from your customers.
Invoice factoring typically employs a factoring fee, also referred to as a discount rate, whereas invoice financing often utilizes a traditional interest rate. The cost of both forms of business financing tends to run high.
What should I ask when comparing Factoring Companies?
Entering into a factoring agreement requires knowing the full impact on your business. Comparing factoring rates is an excellent starting point, but there are other details to consider.
Consider customer reviews when selecting the best factoring company. You’ll want to work with reputable invoice factoring companies.
Here are the most important questions to ask a factoring company.
What are the accounting software requirements?
Many factoring companies require you to connect your accounting program to their system. Ask if the accounts receivable factoring company requires accounting software and, if so, which specific programs are needed.
What is the advance rate?
As we discussed, the factoring rate is crucial due to the high cost of factoring services. However, the primary benefit of invoice factoring is gaining early access to working capital through a cash advance. You want to ensure you get enough of the invoice’s value to justify spending money on invoice factoring. Getting an advance rate closer to the total invoice value can help offset factoring costs.
Who owns the debt?
In most cases, the factoring company owns the debt. But some companies use an asset-based loan model as an alternative to factoring. In those cases, you still get the cash advance based on the invoice value, except you collect from your customers and repay the loan amount to the company. The nuances between factoring and financing are slight but essential.
How much does Invoice Factoring Cost?
The factoring or discount rate is the primary cost in factoring. However, some companies tack on extra fees, such as:
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Origination fees
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Processing fees
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Early termination fees
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Invoice upload fees
Ensure you know the total invoice factoring costs before agreeing to anything. After discussing the fees with the company, review the factoring agreement carefully. There are sometimes hidden fees tacked on at the end. Some financing experts suggest having a lawyer review the factoring agreement.
How long is the factoring agreement?
Most factoring companies operate under a contract, typically ranging from six months to several years. Some companies, like TCI Business Capital, offer month-to-month agreements.
Knowing how long your company is required to work with the factor is essential. In best-case scenarios, the factoring company becomes a long-term financing partner that helps you grow your business and handles your collections.
However, you won’t know if the factoring relationship works for your business until you process invoices with them. It’s nice to have an early exit option if the process doesn’t work for you. Regarding fees, ask about early termination penalties if you were to leave the contract before it expires.
What are the volume requirements, discounts, and charges?
Many factoring companies base their rates on the anticipated volume, which is the total value of the invoices. For instance, some companies require businesses to factor a minimum of $15,000 in monthly invoices.
Not all factoring companies have minimum volume requirements, but they do offer lower rates for the more volume a business generates. Most factoring companies also limit the total amount you can factor per month and charge you extra for going over it.
Am I required to factor all invoices?
Factoring companies differ in the percentage of invoices they require. Whole ledger factoring means the business must factor its entire accounts receivable.
Many factoring companies do partial ledger factoring, where a business is only required to meet specific volume thresholds. Spot factoring enables companies to upload invoices as they arrive.
Will you notify my customers?
Some factoring companies alert your customers when they acquire the invoice, and others don’t. As a small business owner, you might not want customers to know you sold their invoices.
Ask the factoring company how they handle the collections process and communicate with your customers. You don’t want to risk damaging the customer relationship.
Do you offer recourse or non-recourse factoring?
We discussed this earlier in the article, but as a reminder:
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Recourse factoring: You’re required to repurchase invoices when customers default.
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Non-recourse factoring: Offers limited protection against bad debt invoices but incurs higher costs.
Every factoring company has its own unique policy. Some only offer one form of factoring, while others provide both.
If you pursue non-recourse factoring, ask follow-up questions on when it applies and what the exceptions are. Non-recourse factoring agreements carry longer terms and lower advance rates.
Factoring companies run credit checks on your customers in both cases, but non-recourse credit requirements are higher. Usually, if the customer has solid credit, you can trust them to pay their invoice and don’t need to pay the extra cost for non-recourse.
What are my alternatives to Invoice Factoring?
Most small businesses require financing at some point, whether to cover day-to-day expenses or to fuel growth and expansion. Invoice factoring is one option to help companies acquire working capital and stabilize cash flow, but there are other options if it isn’t the right fit for your business.
Working Capital Loans
Invoice factoring is a form of working capital financing, but there are also working capital loans, which provide cash to cover business expenses. Various short-term and long-term working capital loans help your business meet expenses and stabilize cash flow.
Merchant Cash Advance
A merchant cash advance provides an influx of working capital based on a company’s average credit card sales. The business then repays the advance with a percentage of future credit or debit card sales.
Business Lines of Credit
A business line of credit provides a business with funding as needed. It’s like a credit card, where the business receives a set credit limit and can draw funds to cover its cash flow needs. And speaking of business credit cards, you can also look into the Brex Corporate Card to help with business expenses.
Revenue-Based Financing
Revenue based financing provides businesses with working capital and flexible payment terms. The company’s revenue determines the loan amount. The company then repays the loan with a percentage of future revenue. It’s excellent for businesses with inconsistent revenue streams since the payment fluctuates with revenue.
Other Small Business Loans
Businesses looking for long-term loans with higher borrowing amounts can look into the following:
Factoring Rate Comparison – Final Thoughts
Invoice factoring is ideal for small businesses that require a surge in working capital and have reliable customers in their accounts receivable. The costs are higher than those of a traditional bank loan, but approval is much easier, and the funding time is significantly quicker.
Businesses with good credit that can wait for funding will get lower rates with other financing options. However, invoice factoring doesn’t add to a company’s debt, and the factoring company handles invoice collections.
If you decide to pursue factoring receivables, compare the rates from the top factoring companies to find the best pricing for your company. With a reasonable factoring rate, the cost isn’t that much greater than offering an early payment discount.
Contact us today to discuss the best options for your business. Our loan experts will provide a complete breakdown of the costs, terms, and conditions so you won’t have to worry about hidden fees.
