Invoice Factoring: FAQ

If you’re thinking about using factoring to boost your company’s cash flow, take a look at some frequently asked questions that many of our other customers have asked.

When you sell your accounts receivable at a discount, you’re factoring. Many businesses use this to generate short-term liquidity when the cash they need is tied up in receivables that are due on 30- or 60-day terms.

You establish an account with a factoring company wherein you sell them your invoices for services and goods that you have already sold and delivered, and you receive a cash advance up front, and then you receive an additional payment when your client pays the invoice. You get the full amount of the invoice less the discount and fees.

Your company still handles the billing, but on the invoices that you have sold, the payment address is the address of your factoring company. The exception would be if your agreement calls for the factoring company to deal with the billing directly.

The factoring company receives an official notice indicating the proper payment address, and your invoices going forward will have that address as well.

The factoring company only contacts your clients if you sold one of those clients’ invoices to the factoring company.

Some factoring companies offer non-notification factoring, but that is extremely rare, and when it does happen, the qualifying criteria are often far more strict. However, factoring has become so commonplace that it does not carry any stigma.

Not in most cases, but the larger the volume, the lower the fees, in most cases.

Your industry, invoice volume and payment terms can all play a role, as can the creditworthiness of your customers. In most cases, the fee runs between 1 and 5 percent per thirty days.

Generally, the initial invoice falls between 50 and 95%, depending on the industry, sales and delivery terms, invoice volume, time outstanding and other factors.

This depends on your arrangement with your factoring companies. How often are you sending invoices along? Some companies do this on a daily, weekly, bi-weekly or monthly basis. Factoring companies can generally pay advances by wire transfer, ACH, teller deposit or check through the mail.

Once your clients pay their invoices in full, the factoring company releases the remainder of the payment, which is the rest of the invoice amount less discount and fees.

Most factoring companies do not require long-term contracts, but if you are willing to sign one, the factoring company may give you more beneficial discount rates or terms.

Is your business legally registered to sell goods or services on terms? Then you can qualify with a factoring company.

Factoring approval is not made on the basis of the business that wants to sell invoices. Instead, it is made on the basis of the creditworthiness of the companies that owe on the invoices. This is one reason why factoring is so popular among businesses that are small and up-and-coming, because oftentimes they go through credit issues that make this sort of financing helpful.

Actually, most companies that use factoring are smaller entities and startups.

Depending on the factoring company and the client business, it can take between 1 and 10 business days. In most cases, it takes no more than three business days, and funding happens within one or two business days after invoice submission from that point.

Most factoring companies have an online application that asks for some basic documentation to be uploaded. Upon approval, the factoring company sends along final documents to initiate funding.

Generally, factoring companies do not charge application fees. However, there are due-diligence fees in many cases to take a look at your accounts for funding; those come out of your final payment.

Business owners should expect to provide proof of business registration, customer lists, photo ID of the principals, invoices and a copy of the accounts receivable aging.

This depends on the factoring company. In most cases, though, if the client does not pay the invoice, the factoring company will return the invoice to the client business and ask for the advance back.

In fact, as long as a client business sits within Canada or the United States, that business can use factoring.

Most factoring companies provide regular reports to their client businesses.

Just about all factoring companies require some sort of guarantee to affirm a client business owner’s integrity and representations as well as the owner attesting that he or she will follow the terms and conditions of the factoring agreement.

The easiest way is to stop submitting invoices. After that, send written notice to the factoring company, and when all of the outstanding invoices are paid and the conditions of the contract have been met, the rest of the client business’ rebates are paid out.

The cost of factoring is higher than that of a loan or line of credit – as high as 4% per month. However, it does not go on a business’ credit profile, as a loan or line of credit would.

This is either financing, payment or payment assurance to a supplier made on a buyer’s behalf to procure or produce and deliver pre-sold goods.

If a business has a customer order but does not have the cash on hand to fulfill that order, that business can request an advance on the purchase order, use the funds to fulfill the order, and pay back the advance after the order is fulfilled or delivered.

Costs vary, but they generally fall around 5% of the funds used.

Most companies consider requests between $10,000 and $10 million.

Funding companies tend to prefer to use a Letter of Credit (LOC), although cash, check and credit can also be available.

This answer will vary by the funder, but a typical response is 100% of the cost of the goods or as much as 70% of the value of the purchase order going toward production only, not soft costs such as labor, except in cases where an exception is granted.

Purchase order advances only go to production costs, not to pay a supplier directly.

There are some cases where payments to multiple suppliers are possible.

A business would send in an application with support documents that show that a product has been pre-sold (but not through consignment) and that a reasonable profit margin is expected. The purchase order has to come from a business that is creditworthy and legally registered, and the invoice must be non-cancelable.

In many cases, the answer is yes.

There are no application fees.

This can range between the next business day and 90 days, depending on the length of the client business’ relationship with the funder, the type of goods, the amounts ordered, capacity for production, funding criteria and sales and delivery terms. On average, funding takes between seven and ten business days to complete.

The expectation is that payment will come immediately from the sale proceeds after delivery. In most cases, this should not take more than 45 days from funding.

Most purchase order funders allow client businesses to fund a single purchase order or hundreds, depending on their needs.

Yes – owners have to affirm that they will abide by the terms and conditions of the agreement.

Purchase order funding happens before services or goods are delivered to the buyer, while invoice funding happens after delivery.

Any loan that is secured by assets, whether tangible or intangible (such as receivables, inventory, real estate, intellectual property and the like). Often the loan is for a percentage of the asset. In most cases, the asset should be easy to convert to cash when necessary for recovery.

Most funders will consider just about any business asset, ranging from invoices and rolling stock to machinery.

This will depend on the lender.

This will depend on the lender as well, but many lenders do not charge fees.

Every loan is different, so the interest rate depends on term, principal amount and perceived risk.

Most lenders can make an initial determination within 1-2 business days of receiving all documentation, with closing happening between two and four weeks later.

The short-term requirements generally run between a 90-day minimum and a three-year maximum, although a five-year maximum is possible in some cases.

Lenders do look at the principal’s credit, but approval comes from the value of the asset itself.

Many lenders will work with startup businesses for asset-based loan funding.