FAQ - Accounts Receivable Financing
How does invoice factoring work?
Invoice factoring, or accounts receivable factoring, works by letting you get paid right away for outstanding invoices. The factoring company purchases your invoice, giving you a percentage (often between 70% to 90%) of the invoice’s amount up front. Your client then pays the factoring company, and the factor forwards the rest of the payment to you minus its fee. Some factors let you set up the arrangement in a way that your clients don’t realize you’re using a factor.
What kind of businesses are best suited for invoice factoring?
Invoice factoring can be a good option for any business-to-business company that has uneven cash flow. This might be due to discrepancies between when it has to pay expenses and how long it takes for clients to pay invoices. This can include a wide range of businesses. For example, marketing firms, staffing companies, and wholesalers may need to purchase materials or make payroll while they wait to get paid.
What can I use invoice factoring for?
Invoice factoring is generally best for short-term expenses and upfront investments. An invoice factoring loan can help smooth your cash flow by giving you money for ongoing expenses while you wait for clients to pay their invoices. Invoice factoring can also help growing companies that need cash to buy materials or hire new employees.
How much does factoring cost?
Invoice factoring cost, fees, and expenses can vary from one company to another. Funding Circle’s lending partner charges a weekly factor fee that’s taken out of the reserve (the amount of the invoice that wasn’t advanced), and then you’re sent the remainder. Other factors may also charge an initial one-time fee to get started, monthly maintenance fees, invoice processing or advance fees, early termination fees, or even monthly minimum fees.
How does repayment work?
Unlike a loan, invoice factoring isn’t a debt. The factoring company purchases your invoice and sends you money, and then gets repaid by your clients. You may have to notify your customers that you’re working with a factor and request that they send payments to the factor. Or, you may have to open a new bank lockbox and ask clients to send future payments there. The bank account may be in your name, and your clients won’t know you’re using a factoring service. However, the factor can still control the funds.
What happens if my client doesn’t pay?
Many factors offer full-recourse factoring, which means you’ll be responsible for paying the factoring company directly if your client doesn’t pay an invoice. If you have a non-recourse agreement, you won’t be responsible for unpaid invoices. Then, the factor may pursue payment from your client. If you know that your client may be late with a payment, it’s best to reach out to your factor right away to tell them about the delay.
What are the pros of invoice factoring?
Invoice factoring for small business or larger ones can have a multitude of benefits. Invoice factoring loans can quickly give you access to the money you’re owed, helping you run your business and invest in new opportunities. It can be an essential tool for businesses that work with large clients that pay on net-60 or net-90 terms, and for fast-growing companies that need cash for their expansion. And, because factoring depends on your clients’ ability to pay outstanding invoices, it can be much easier and quicker to set up a factoring service than to qualify for a loan or line of credit.
What are the cons of invoice factoring?
Invoice factoring can have disadvantages as well. For starters, factoring may not be an option for business-to-consumer (B2C) companies, as they don’t have outstanding invoices. Factoring can also be more expensive than other forms of financing. Your funding amount is limited by your outstanding invoice amount, and you may be responsible for paying the factor if your client doesn’t pay its invoice. While Funding Circle’s lending partners don’t do this, some factoring companies also require you to factor every invoice or charge fees if you don’t use the factoring service.