Here you can learn more about What is factoring. provide the ideal solution for businesses looking for better cash-flow management. When searching for the perfect company to meet your factoring needs, there are several common questions that should be asked. Some factoring companies serve multiple industries and some specialize in niche ones; the key is to find the factoring company that can help your business grow.

the perfect factoring company

Industry leader, Interstate Capital, has collated a list of the most important questions to understand what is factoring.

What is factoring?

Factoring is a form of financing, otherwise known as “accounts receivable financing,” that provides businesses with immediate cash for their invoices, without them having to take out a loan. The third party (factor) buys the company’s invoices and then collects on those invoices on the company’s behalf, for a percentage of the invoice.

How does factoring work?

Factoring is not the same as a bank loan; you do not get into debt when you sign a factoring agreement and you do not need collateral to secure the cash; it also does not show up as debt on your balance sheet. Rather, factors focus on the creditworthiness of your clients. The factor first does a credit check on your client and, if they are satisfied, they pay you the majority of the invoice amount, and the balance once your client has paid the invoice, less their fee.

What is a factoring company?

To better understand what is factoring, effectively a relieves businesses of the stress and worry associated with a restricted cash flow. Factoring companies provide an instant cash solution instead of businesses having to wait 30 to 60 days for clients to pay for services or goods, effectively giving them the opportunity to take on more clients and grow.

What does a factoring company do?

Factoring is a centuries-old debtor-financing practice that enables companies to enhance their cash flow and expand their business. Some factoring companies take care of all the associated back-office admin as well, with limited paperwork and documentation required from their clients. Unlike a bank, funds are not restricted and grow as your invoices grow. Several factoring companies give you access to cash needed in as little as 24-hours.

Why should you consider factoring?

Factoring essentially provides a stepping stone towards more traditional forms of finance, such as bank loans. It’s a short-term solution to help businesses boost their cash flow. Consider factoring if you need to free up your cash flow in order to use that capital elsewhere; if you are a small businesses with few assets; or if you are a start-up with no credit history.

When should you use a factoring company?

Companies constantly face peaks and troughs but there are a few definite “signs” that indicate when it’s time to begin using a factoring company: if your customers take a long time to pay and you are struggling to manage your cash flow in the interim; if you don’t have the manpower to do the back-office work associated with collecting on invoices; if you have seasonal cash restrictions; and if you are a new company with few assets and no credit history.

The definition of factoring

Factoring is defined as the process whereby a third party buys a company’s invoices at a discount in order for that company to raise capital. The factor pays the company approximately 80% of the value of the invoice, collects on the invoice on the company’s behalf, and then pays the outstanding balance, minus their factor’s fee. They do not extend credit and, therefore, are not primarily concerned with a business’ creditworthiness – credit is based on sales.

How to choose a factoring company?

When choosing a factoring company, you need to first pinpoint your business’ unique needs. Find a factoring company that specializes in your industry, that way they will know first-hand what tools are required to factor your invoices successfully. Choose experienced factoring companies that have a high customer-service rating and competitive discount and advance rates.

Who uses factoring?

Factoring is accessible to companies ranging from small business start-ups to large corporations in a variety of industries. The following industries commonly make use of a factoring company:

Who needs factoring?

Factoring is open to any and all businesses, big or small. It provides the ideal solution for companies that are experiencing a tight cash flow; have slow-paying customers; who don’t yet have a credit rating, or for those who don’t have many assets to use as collateral.

The benefits of invoice factoring?

Invoice factoring benefits companies that have a limited cash flow and require the capital for other areas in the business that would better increase profitability. For example, companies who use invoice factoring can then redirect the cash flow towards payroll, buying new equipment, restocking supplies, hiring more employees, etc. and generally expand and develop at a much quicker rate.

Factoring versus a bank loan

The main difference between using a factoring company and a bank loan is the flexibility factoring companies offer. Factoring fees are slightly higher than a bank loan; however, factoring offers much more flexibility as there are no restrictions on the amount you can access – as your invoices increase, so does the advance available to you. Similarly, you are not charged interest as you would be by a bank, you do not need to have a credit rating, or any assets, and you don’t get into debt.

Factoring types: Recourse vs. non-recourse factoring

Most factoring companies offer both recourse and options. In a recourse agreement, the client takes responsibility if the invoice does not get paid and buys the invoice back. In a non-recourse agreement, the factor covers the cost if the client does not pay. For obvious reasons, the latter option is more costly.

Factoring agreement

A factoring agreement is the document you sign, together with your factoring company, outlining the expectations and requirements of the transaction. The details will vary from factor to factor, but all basic agreements should state who is responsible for what, the fees involved and the processes to follow. 

Factoring rates

The costs associated with factoring are dependent on the discount and advance rates, and the length of the factoring period. The discount rate is what companies are charged to borrow the money, ranging from 0.49% to 5%, based on the original amount of the invoice; Interstate Capital offers competitive factoring rate as low as 0.49%. Advance rates vary, depending on the type of industry involved and the value of the transaction, and range from 70 – 100%.

Are factoring companies regulated?

Factoring companies are largely unregulated; however, associations such as the Commercial Finance Association and the International Factoring Association “self-regulate” factors and monitor and maintain high standards within the industry.

Is factoring an option for small business?

Small businesses are often limited by a restricted cash flow and a factoring company provides the perfect solution to this problem. Ordinarily, small business owners would seek a loan from a bank to bridge the cash gap; however, bank loans are only accessible to clients with a credit history and assets. They also get you into debilitating debt. Factoring companies provides small businesses with interest-free access to cash.

For professional advice and personalized factoring service, and to learn more about what is factoring and what it can provide to your business, you can get a complimentary factoring assessment today.