Invoice Factoring FAQ

Invoice Factoring FAQ and Glossary of Terms

Invoice Factoring FAQ – A glossary of basic business finance terms relative to invoice factoring, also known as receivables financing.

WHAT SETS THE BEST FACTORING COMPANIES APART?

Invoice Factoring FAQ: What sets the best invoice factoring companies apart?

We believe the best invoice factoring companies seek to minimize the cost of factoring while maximizing the benefits of factoring receivables for their clients. They earn their clients’ business, day in and day out with competitive factoring rates, flexible options and superior customer service.

Every factoring company offers unique perks that might make it more or less appropriate for your organization’s factoring needs. Some of the things we can help you find are:

Experienced teams – our team has more than a decade of experience working inside a factoring company and we put this expertise to work for our clients
Low factoring fees and high advances
Fast approvals and high approval rates – companies that look for reasons to say “yes!” instead of no
Fast, low-cost or free same / next day funding
No hidden fees that jack up the cost of factoring
Flexible options that keep you in control (no factoring minimums, no long term contracts)
Add-ons like free credit checks on your customers
Industry discounts or industry-specific benefits like fuel cards and fuel discounts for transportation companies

WHY FACTOR INVOICES?

Invoice Factoring FAQ: Why Factor Invoices?

Why do organizations unlock the working capital represented by unpaid customer invoices, instead of simply waiting for customers to pay?

Companies that factor invoices can focus on growing their organization instead of chasing invoices or performing collections. Saving time and money on accounting activities are only one benefit for companies that factor invoices. An organization might also choose to factor invoices when:

They want to offer extended terms to their customers as a competitive advantage
Immediate access to capital will enable them to take advantage of new business opportunities
Faster cash flow will let them take on new business, serve larger accounts or fulfill bigger orders
They have slow-paying customers who occasionally take 30 days – or longer – to pay
They need to improve cash flow in order to meet operating expenses
They want to negotiate discounts for early payment with their own suppliers and vendors

The opportunities lost by an organization during the time they wait for customers to pay is often referred to as “opportunity cost.” These include any activities an organization has to pass on because cash flow isn’t keeping pace.

WHAT IS INVOICE FACTORING?

Invoice Factoring FAQ: What is Invoice Factoring?

Invoice factoring is a centuries old business finance tool which allows organizations that invoice their customers for payment to receive immediate payment by factoring them with a third party, called a Factor, for a small fee, called a factoring fee.

Invoice factoring has several synonyms, and is sometimes referred to as:

Receivables financing or receivables factoring
AR factoring (or A/R factoring)
Accounts receivable or account receivables factoring
Invoice financing, invoice discounting or invoice factoring

No matter which term is used to refer to the process, invoice factoring is a financial transaction whereby a business factors a customer invoice with a third party – called a Factor or Factoring Company – for a small fee. We can help you find companies that offer low invoice factoring fees starting from 1% and advances ranging from 85-98%.

WHAT IS OPPORTUNITY COST?

Invoice Factoring FAQ: What is Opportunity Cost?

The longer customer invoices go unpaid, the less working capital is available to the organization. Limited access to working capital equates to limited means to take advantage of opportunities to grow.

These missed opportunities are what is referred to as opportunity cost; it is the ‘cost’ an organization pays when they don’t use invoice factoring to unlock the working capital tied up in customer invoices, so they can use it to grow more quickly.

Lost opportunities (or opportunity cost) includes all the things a company can’t do because cash flow doesn’t permit it. This could include:

Having to wait to take on new business
Being limited in the size of orders a company can fulfill
Being limited in the number of customers a business can serve
Being unable to take advantage of vendors’ early-pay discounts
Being unable to extend better payment terms to customers as a competitive advantage
Inability to pivot quickly to take advantage of emerging opportunities

WHAT IS AN OPPORTUNITY COST CALCULATOR?

Invoice Factoring FAQ: What is an Opportunity Cost Calculator?

An opportunity cost calculator (or invoice factoring calculator) can show you how much working capital you could unlock by factoring invoices instead of waiting for customers to pay. By definition, any opportunity your business can’t take advantage of because it’s not factoring to unlock working capital more quickly is the “opportunity cost” to your business.

By calculating opportunity cost, you can find out how unlocking the working capital tied up in customer invoices could allow you to expedite cash flow if you factored invoices and put the money to work to grow your business faster.

Take the next step and request a free, no-obligation quote for receivables financing – you could go from approval to your first funding in hours.

We’ll help you identify what’s most important to you and your business, and find a factoring program that represents your best match, so that you can focus on growing your company more quickly.

Get a Free Quote

Invoice Factoring FAQ - Glossary of Terms

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Invoice Factoring FAQ – What are Common Invoice Factoring Terms?

Even though invoice factoring is a centuries-old business finance tool, some of the common terms used in the process of factoring invoices might be unfamiliar to those who have not factored receivables before. Invoice factoring is also commonly referred to as:

receivables financing
receivables factoring
factoring financing
accounts receivable financing
AR financing
invoice financing
invoice discounting
factoring loan or factoring lending

The parties involved in the invoice factoring process

Factor (aka invoice factoring company, receivables financing company): An organization that purchases accounts receivable at a discount to expedient the cash flow for the factoring client.

Factoring Client (or Client): the Factor’s customer.

Account Debtor (or Debtor): the Client’s customer.

Common terms related to the process of factoring invoices itself

Advance: The amount of money advanced after the factoring client submits an invoice to the factoring company, usually expressed as a percentage of the invoice, such as 98%. For example, a client factoring a $100,000 invoice at a 98% advance rate would receive an advance of $98,000.

Advance Rate: The percentage of a submitted invoice paid out to the Client at the time the invoice is factored.

Funding: The process of delivering money to the Client for the purchased invoice.

Factoring Agreement: A contract between the factoring company and its client outlining the terms of the program, including things like fees, advance rates, invoice processing procedures, contract length, minimums, client obligations, terms if the client decides to change factors or stop factoring, and so on.

Factoring Fee (or financing fee, factoring rate, or invoice discount rate): The percentage of invoice amount or fee retained by the Factor when an invoice is paid, usually specified in the factoring agreement, but sometimes depending on the customer invoice being factored.

Factoring Loans: Invoice factoring is a debt-free form of business financing. Factoring loans are granted as “advances” on unpaid customer invoices and are repaid when the customers remit payment for the invoices.

Factoring Minimums: Some factoring finance companies require clients to factor a minimum dollar amount of invoices monthly, to factor all the invoices of a given customer, or to factor a minimum number of invoices each month.

Invoice: A bill generated upon completion of services or delivery of goods, usually with payment terms such as net 30 or upon receipt. For the purposes of invoice factoring, this is extended to other receivables, including e-commerce vendor earnings statements, supply chain sales reports, government contracts, ongoing retainers, and more.

Invoice Factoring Calculator: An invoice factoring calculator shows the potential advance, factoring fee, and reserve (or holdback) a client may be offered if they factor invoices. It can calculate these figures for a single invoice, average invoice amount, or the sum total of all invoices generated in a given time period, such as a month. Synonymous with opportunity cost calculator.

Micro factoring: Micro factoring is synonymous with small ticket factoring or small invoice factoring. Micro factoring is the practice of factoring small invoices (typically under $20,000 or even less than $10,000). Many factoring companies won’t take these deals as they don’t provide a profit adequate to offset the investment of work by the factoring company (salaries, credit checks, underwriting, and so on).

Opportunity Cost Calculator (or invoice factoring calculator): A calculator providing results that show how much working capital is tied up in customer invoices as well as the fees related to gaining immediate access to the working capital represented in total accounts receivable. The term opportunity cost refers to the opportunities a business loses due to slower cash flow while waiting for customers to pay.

Payroll Factoring: Payroll factoring financing (aka payroll loans or payroll factoring loans) is the practice of factoring invoices in order to fund payroll and payroll-related expenses, including payroll taxes, salaries, benefits, and processing fees. Though commonly used by staffing agencies, payroll factoring can be used by businesses that are eligible for invoice factoring.

Receivables: Receivables are assets on an organization’s books that are non-liquid in that they cannot be accessed until a customer remits payment (except through invoice factoring). They include client or customer invoices, vendor earnings statements, government contract receivables, progress invoices, retainers, and other term-based receivables (e.g., net 30, and so on).

Reserve: The difference between the invoice amount and the Advance + Factoring Fee that is held back by the Factor until an invoice has been paid (by the Debtor). Also referred to as a “holdback.”

Reserve Release: The delivery of reserve funds paid to the client when an invoice is paid by a Debtor.

Selective Invoice Factoring: Similar to spot factoring, selective invoice factoring is a business finance option wherein the client is able to select which invoices to factor vs adhering to factoring minimums or requirements to factor all invoices, all invoices of a specific customer, etc.

Small Ticket Factoring or Small Invoice Factoring: See Micro factoring.

Spot Factoring: Spot factoring, or spot invoice factoring, refers to one-time factoring vs companies that use factoring as a recurring or ongoing business finance tool.

Recourse vs. Nonrecourse factoring companies

Finally, it is also important to distinguish between two types of factoring companies, those that factor invoices without recourse (also known as non-recourse factors) and those that factor with recourse:

Recourse Factoring (or full recourse factoring or factoring with recourse): Recourse Factors do not assume the credit risk for the invoices they factor, and the client will be required to buy back invoices they have factored which have not been paid in a timely manner by the account debtor, and may also incur related collections fees. Most factoring companies factor with full recourse.

Non-recourse Factoring (or non-recourse factoring or factoring without recourse): Non-recourse factoring companies assume the credit risk for the invoices they factor. Organizations that factor with a non-recourse factoring company can reduce their financial risk from bad debt (or even eliminate it entirely).

We would be happy to answer any questions you have about invoice factoring. Request a quote and we’ll reach out to you with more information.