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Quick Guide to Invoice and Accounts Receivable Factoring

What is invoice factoring?

Invoice factoring is essentially a financial transaction where a company/business sells its accounts receivables (or invoices) at a discount to another company. This other company is then responsible for collecting on that invoice from the third party.

There are typically three parties involved in a factoring transaction: the seller, debtor, and the factor. The seller is owed money (accounts receivable) by the debtor. The seller then sells its invoices at a certain discount to the factor (third party finance company) to get immediate cash. Ultimately, the debtor pays the full invoice amount to the factor, therefore the factor makes a percentage gain on the account.

Different factoring loans you can consider

There are two main types of factoring loans that one can choose from when it comes to jumpstarting your business with extra funding. Recourse factoring is an option that requires you to pay for any funds not collected by your factor. In turn, the factor you are working with charges you a cheaper rate for these accounts receivable financing services.

Non-recourse is another type of invoice factoring where the factor assumes all risk if they are unable to collect your unpaid sums. This option is more expensive, but can provide more reliability unlike the other option. If you are unsure with which route to take, speak with a factoring business in your area to determine which type of factorization services will be best suitable for your situation.

Why you should consider factoring your invoices or accounts receivable

Many businesses have cash flow problems. Sometimes customers pay 30-120 days after being invoiced, which can cripple certain businesses. So, a business can choose to factor those accounts receivables and get the cash now for a slight discount. To many companies, factoring invoices can be a boon to business. It allows them to get immediate cash flow and to grow more aggressively.

Factors focus on the credit worthiness of the debtor, not the seller, when deciding to factor an invoice; many times in cases that a normal bank wouldn't loan money against.

How to choose the right factoring company

You should always talk with several different companies to get a feel for their individual styles of business. You can use Resource Nation's Factoring matching service above to have 5 high-quality factoring companies contact you.

  • Have a meeting (phone or in-person) with each company that contacts you.
  • Gauge their professionalism, their mannerisms, how they treat you, and their experience level.
  • Remember, these people will be dealing with some of your most valuable clients/customers to collect payment on your invoices.
  • You don't want an unprofessional or inexperienced company contacting your clients and harassing them.
  • You want your clients to have a good experience when dealing with these people so that it doesn't sour your relationship with them.
  • You should also review all letters and correspondence that the factoring company uses to contact clients.
  • Find out how the factoring company handles past-due accounts and at what stage they refer the client to collections.


Questions to Ask When Outsourcing Invoice Factoring

When you are near the decision making part of your invoice factoring process, there are a few additional questions you will need to ask your chosen factor. One question to ask that will end up saving you time and money is whether or not your factor will be able to accept fewer invoices with larger amounts. Choosing to go this route will save your factoring business more time in the long run and save you in fees charged. Another question to ask during the factorization process to save you money is in regards to negotiating for more money up front.  Factors may allow for a larger sum in the beginning of the accounts receivable financing process, in exchange for a higher discount rate.

Read more about how to choose a factoring company from our Buyer Guide and by conducting your own preliminary research.

If you have slow paying clients, ask the factor how they go about collecting sums and the duration of the time they allow for each client to take to pay off their invoices. Factoring loans can be a great way to feed extra money into your company, but make sure to decide on the most qualified factor for the job and review costs associated with it beforehand.

Find factoring companies within your state by searching our Local Provider Directory.