Invoice factoring isn’t the most household term, which can sometimes deter people from inquiring about how it can help their business.
Here are some of the most frequently asked invoice factoring questions to help you understand what it is, how it works and how it can benefit you and your business.
What is invoice factoring?
Accounts receivable factoring, also known as invoice factoring, is the process of selling your active invoices to a factoring company for a cash advance.
How does accounts receivable factoring work?
1. Your business submits unpaid invoices for completed work.
2. The factoring company verifies those invoices and advances you up to 95% of the funds within 24 hours. The rest is kept as reserve.
3. The customer pays the invoice amount to the factor.
4. The factor releases the rest of the reserve to you, minus a small factoring fee.
How long has factoring been around?
Factoring has been around for thousands of years. The ancient Phoenicians and Romans were both known to use primitive forms of factoring. The pilgrim’s journey to America was financed by cash advances provided by a factor. The practice is the same, but the method has changed slightly over time.
Is invoice factoring a loan?
No. Factoring is a way for your business to turn unpaid invoices into cash.
Why is invoice factoring better than a bank loan?
– Invoice factoring is fast. Most companies receive their payment within 24 hours of being approved for factoring.
– Approval is based on the credit strength of your customers, so those with less-than-perfect credit can still apply.
– Factoring is not debt, unlike a bank loan that has to be paid back.
– There is also no funding cap using accounts receivable factoring.
– Startups can use factoring as long as they have invoices.
Are there different types of factoring?
Yes. There is both recourse and non-recourse factoring.
What’s the difference between recourse and non-recourse factoring?
– With recourse factoring, your business must buy back receivables that the factoring company wasn’t able to collect payment on.
– With non-recourse factoring, the factoring company takes the risk of your customers not paying. Due to that, non-recourse factoring fees are a touch higher.
What businesses qualify for accounts receivable factoring?
Almost any business-to-business company qualifies for factoring services. Some popular industries that use factoring are trucking, staffing, healthcare, technology, construction, oil and gas, education and manufacturing, among many others. Don’t see your industry? Not a problem. Contact us and we can talk about your options.
Can only B2B companies factor?
Yes. Business-to-consumer transactions are not eligible for invoice factoring.
Can my business factor if it has little to no credit?
Yes. The factoring company will look to the credit of your customers when deciding who to fund. Unlike a bank loan, the credit of your business is not held against you.
Does it matter where my business is located geographically?
No. Factoring is a virtual service – everything can be done over the phone, email, fax, wire and mail. This means your business can be located in any city or state and still qualify for accounts receivable factoring.
Is my business eligible for accounts receivable factoring if it owes back taxes?
It might be. Eligibility is determined on a case-by-case basis when it comes to tax issues.
Can I factor if my business is considering backruptcy?
Yes. Factoring companies will consider doing business with those considering Chapter 11 bankruptcy.
What does my business need to provide to start factoring?
Your business will need:
– An accounts receivable aging report
– A list of your customers
– A list of the invoices you want to factor
– Articles of Incorporation
Do I have to sign a factoring contract?
No. Factoring is a service that can be started and stopped whenever you want without penalty.
Will I have to factor all of my invoices?
No. You can pick and choose which invoices you would like to factor.
Are accounts receivable fees deductable?
Yes. It’s deductible as a business expense.
Will my customers know if I choose to factor?
Yes. That information will be disclosed to them via the factoring company.
How do I explain to my customers that I’m factoring?
You don’t have to. The factoring company you choose will tell your customer you are factoring your account receivables.
How will my customers know where to send payment for invoices I’ve chosen to factor?
The factoring company will let your company know where they will be sending their payment.
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