If your business provides services to other businesses, then you’re likely familiar with the process of issuing invoices and waiting to be paid. While it’s common for invoices to have 30-, 60- or even 90-day payment terms, this can create issues for your business’s cash flow.
That’s where invoice factoring companies come into play. These companies buy unpaid invoices at a discount so your business gets the funds it needs sooner. Learn more about factoring companies and how to choose the best one for your needs.
What is a factoring company?
A factoring company is a company that provides invoice factoring services, which involves buying a business’s unpaid invoices at a discount. The business gets a percentage of the invoice, say 85%, within a few days, and the factoring company takes ownership of the invoice and the payment process. Once your client pays their invoice (directly to the factoring company), you get the rest of the money your business is owed (the remaining 15% of the invoice amount) minus the factoring company’s fees.
We’ll start with a brief questionnaire to better understand the unique needs of your business.
Once we uncover your personalized matches, our team will consult you on the process moving forward.
Why do businesses work with factoring companies?
Selling invoices to a factoring company can help bridge the gap between when you complete a service and when payment for that service is due. Although you may lose a bit of money to the factoring company, it might be worth it to overcome a cash shortfall.
Factoring companies also tend to move faster than more traditional lenders such as banks, so if you need cash quickly, they can provide efficient solutions.
How factoring companies work
What does it look like to work with a factoring company? If you sell $20,000 worth of invoices to a factoring company, it may agree to buy them for $19,600, taking a 2% factoring fee of $400.
The factoring company usually doesn’t give you the full value of the invoices up front. Rather, it may give you 85% upfront — in this case, $16,660 — and then once your customer pays the invoices, you’ll receive the remaining $2,940.
To make money, factoring companies charge factoring or factor fees (sometimes also called discount rates). These fees tend to fall anywhere between 1% and 5% of the total invoice amount.
The factoring fee you receive will typically depend on how much the invoice is worth, your business’s sales volume, how creditworthy the customer is and whether or not the factor is "recourse" or "nonrecourse,” among other qualifications.
It’s important to note that if the factor is recourse, your business is liable for the debt if your customer doesn’t end up paying their invoice. With nonrecourse factoring, the factoring company assumes most of the risk if your customer doesn’t pay, but it charges a higher factor rate to do so.
Are factoring companies a good idea?
Working with a factoring company can be a good idea if you need to manage cash flow issues or pay short-term expenses — especially if you can’t qualify for a bank financing or need faster access to capital.
Compared to invoice financing, factoring can be a better option if you don’t mind giving up control of your invoices, and you trust the factoring company to deal with your customers in a professional manner.
Here are some advantages and disadvantages of factoring to consider:
Advantages of factoring companies
Speed up cash flow. If you need working capital to cover a cash gap when waiting for customers to pay their invoices, an invoice factoring company can step in to help.
Flexible payment terms for customers. If longer payment terms are keeping some of your best customers happy, you can keep your payment terms while also keeping your business running smoothly.
Disadvantages of factoring companies
Expensive. Working with an invoice factoring company can be expensive due to its fees.
Loss of control. You also lose a bit of control when it comes to your customer relationships, as invoice factoring companies take ownership of your invoices and how they get paid.
How to choose a factoring company
If invoice factoring sounds like the right funding solution for your business, then the next step is to find the best factoring company for your needs. As with any type of small-business financing, compare options to make sure you’re getting the best terms and lowest fees possible.
When comparing invoice factoring companies, consider the following:
Types of companies they work with
It helps to work with a factoring company that’s familiar with your industry and business model. If it already works with similar businesses, this experience can help ensure a smooth factoring process. Some questions to ask include:
What their factoring process looks like
Find answers to these questions:
Is there a maximum (or minimum) number of invoices the company will fund?
Will it manage all of your accounts receivable, or will you retain control and decide which invoices to sell?
How quickly will you receive the funds?
What happens if a client fails to pay their invoice?
With invoice financing, a business uses unpaid invoices as a form of collateral when pursuing a cash advance. In this case, the business is still responsible for collecting payment.
With invoice factoring, the factoring company is responsible for collecting payment.
Fees and other requirements
One of the most important details to consider is how much each factoring company charges for its services. It will also likely have requirements that your business must meet in order to qualify for financing. Find the answers to these questions:
How much is the factoring fee or discount rate?
What percentage of each invoice will you receive as an initial advance?
What type of documentation (such as tax returns or financial statements) does the company require?
Best factoring companies
If you’re looking for a place to start your search, consider these top factoring companies:
altLINE works with a variety of small businesses, including startups and those with less-than-perfect credit histories.
altLINE offers advances up to 90% of the value of your invoices, with factor rates starting at 0.5%. The company works with small businesses across a range of industries, such as manufacturers, transportation and trucking businesses, wholesale and distributers, staffing businesses and more.
You can get a free quote by providing basic information about your business on altLINE’s website — and if you qualify, receive funding in 48 hours.
If you want your accounting or invoicing software to factor your invoices, FundThrough is worth considering.
With FundThrough, you can sync your QuickBooks Online account — or other similar software account — and choose which invoices to fund. The company offers two forms of factoring based on the size of your invoices, with advance rates of 100% (minus fees).
Factor fees range from 2.5% to 7.5% and are priced based on 30-day payment terms.
You can sign up for a FundThrough account for free by providing basic information about your business, connecting your invoicing software and linking your business bank account. After you’ve applied, FundThrough will offer funding recommendations within one business day, but you’re under no obligation to take them.
FundThrough also acquired Bluevine’s factoring business in January 2022 and now services the lender’s former invoice factoring customers.
RTS Financial is a well known factoring companies for trucking businesses. With RTS, you can access financing within 24 hours using a web-based portal to upload your invoices and manage our account online.
Because RTS specializes in the trucking industry, the company also offers a packaged fuel and factoring program that allows you to combine your factoring, fuel and other trucking-services under one bundled cost.
RTS does not provide any specific details on its website, however, regarding factor fees or advance rates. You’ll have to contact the company directly for more information.
Find and compare small-business loans
If invoice factoring isn't right for you, check out NerdWallet’s list of the best small-business loans for business owners. Our recommendations are based on the market scope and track record of lenders, the needs of business owners, and an analysis of rates and other factors, so you can make the right financing decision.