How Does Invoice Factoring Work?

How does invoice factoring work?

Invoice factoring works by allowing businesses to unlock the money in unpaid accounts receivable invoices as early as the first day a receivable is created.

Generate an Invoice

Apply to factor invoices, then generate a customer invoice and factor it on the same day.

Get a Same-Day Advance

Get free same day funding on factored invoices up to 98% of the invoice amount.

Grow More Quickly

Use expedited cash flow to keep pace with expenses or reinvest in growth more quickly.

Speed up cash flow by unlocking up to 98% of the amount of an unpaid customer invoice or third party earnings statement the same day it’s created.

How Invoice Factoring Works

How it Works

How Does Invoice Factoring Work?

Your business sells products or services to another business or organization, or sells through a third party e-commerce, app, or other platform. For each order fulfilled, an accounts receivable invoice is generated (or an earnings statement or sales report is generated at the end of the month).

Rather than managing the invoice yourself, and waiting weeks or even months for your customer to make payment (or to get paid through the third party platform), you decide to use receivables financing (aka Invoice Factoring) to get immediate access to working capital.

But how does invoice factoring work? Well, if this is your first time factoring invoices, you would first apply and request a proposal from an invoice factoring company. A factoring agreement will include details such as:

factoring rates for advances (generally 90-98% of the amount of the invoice or earnings statement)
factoring fees (usually from 2-8% of the amount of the invoice or earnings statement)
hold-backs or reserves (if any)
any additional fees or conditions

Once approved as a factoring client, the customers whose invoices you want to factor are notified and agree to make payment directly to the invoice factoring company. Your company gets immediate access to up to 98% of the full amount of each invoice you factor – money that could otherwise be tied up for weeks or even months as a receivable. Any remainder (less the factoring fee) is placed in reserve, pending payment of the invoice by your customer.

Once your customer has submitted payment in full, any amount held in reserve is forwarded to you as well. For more details on all that is included, read up on how to choose a factoring company.

Use our Invoice Factoring Calculator to see how much working capital you could unlock if you factored customer invoices instead of waiting for them to pay.

Invoice Factoring Calculator

How does invoice factoring work to free up working capital?

Use the invoice factoring calculator to see how much working capital your organization could access immediately by factoring invoices (receivables, earnings statements, etc.) instead of waiting weeks or months on payment.

Did you know? The time you spend waiting for customers to pay represents lost opportunities. This can be any activity you could undertake to grow more quickly if you had instant access to the working capital tied up in customer invoices. For this reason, an invoice factoring calculator is commonly referred to as an opportunity cost calculator.

Who is invoice factoring best for?

Is invoice factoring right for your business?

The need for consistent cash flow is the most common reason companies factor receivables. If you experience issues restocking or reinvesting in your business quickly, invoice factoring could be beneficial. For example, factoring receivables is beneficial to a seller doing business on third-party e-commerce platforms (think Amazon merchants or, Rakuten, Hayneedle, Wayfair, Walmart, or Zulily vendors) because they often wait 60-90 days to receive payment on earnings statements.

If your company could benefit from gaining immediate access to working capital when you generate new receivables, you may be able to factor them and reinvest in your operation more quickly. This could be the key to taking on new business, expanding your product or service capabilities, covering operating expenses, financing payroll, or simply maintaining cash flow consistent with the financial needs of your business.

See whether any of these sound familiar; if so, invoice factoring could be beneficial to your organization:

You have customers (e.g., other businesses, government agencies, or other types of entities) with terms extending out beyond 30 days or more
You have clients or customers that routinely take longer than 30 days to pay
You need immediate access to working capital to take advantage of new business opportunities
Getting faster access to working capital would allow you to take on a bigger account, larger orders, or fill more orders during the same time period
You find that you regularly need more consistent cash flow to meet operating expenses
You want to gain negotiating power with your vendors and suppliers to lower costs or get fast-pay or cash payment disounts
You’re waiting on money to undertake capital expenditures like equipment purchases, repairs, renovation or expansion

If one or more of these reasons applies to your business, we would be happy to provide you with a free, no obligation proposal to see if factoring accounts receivable would be right for your organization.

How Invoice Factoring Works by Industry

Invoice factoring can be used by startups and businesses in nearly any industry, so long as they generate some type of receivable (invoice, earnings statement, sales report, retainer, contract progress payment, and so on). To find out how factoring works in specific industries, click the links below.

Invoice factoring for staffing, temp employment, and recruitment agencies
Staffing or temp employment payroll financing
Nurse agency staffing factoring
Security guard factoring
Oilfield – oil and gas factoring
Wine, beer, & spirits invoice factoring
Transportation and freight factoring
E-commerce vendor factoring
Amazon factoring and Zulily merchant factoring
Amazon freight factoring
Delivery services and last mile transportation factoring
Distressed companies and turnaround consultants
Supply chain factoring for manufacturers, distributors, and industrial services and suppliers
Waste management companies
Cyber security companies and consultants
Medical supplies and medical device manufacturers
Medical staffing agencies (home health care, nurses, billing specialists, office managers, and so on)
B2B consultants and agencies
Government contract factoring

In addition, there is more than one type of receivables financing available to companies like these. For example, spot factoring or selective factoring enables companies to factor only occasionally. Micro factoring is the practice of small ticket factoring (aka small invoice factoring). Non-recourse factors offer additional protection from bad debt, while factoring with full recourse often delivers the best rates. Non-notification invoice factoring allows companies to factor invoices without their clients even knowing.

Get a Free Quote

Why Get Factoring Services Through Brokers?

APPLY

Why work with us? Simple: We help you find the best invoice factoring companies.

We know what makes a good factoring company and we can save you time by connecting you with the best. For one thing, we have a lot of experience. Our team has direct experience working in a premier receivables factoring company, so we know exactly how to choose a factoring company.

In fact, if you’re still wondering “how does invoice factoring work?” then letting us connect you with the best in the industry is a great place to start. Save time by letting us find the best invoice factoring companies for your business. We have thoroughly vetted these companies and our team, in fact, is made up of former factoring company pros.

What it boils down to, is that the best invoice factoring companies focus on long term relationships with clients. This includes how they deal with you as well as how they approach and manage the process of invoicing and collecting payments from your customers. They want to earn your repeat business and referrals, so they don’t require you to sign long term contracts or factor when it’s not in the best interest of your company.

With top receivables financing companies, there are no hidden fees or unwelcome surprises. Your factoring agreement outlines any and all fees that apply, as well as the percentage of invoice total that will be advanced, held in reserve, and the factoring discount (or fee).

Also, there are no application, proposal, due diligence, processing, notification or funding fees (except for your bank’s wire fees). Plus, it’s 100% free to apply for an invoice factoring quote.

Same and next business day funding means fast access to working capital, which is at the heart of customer service for factoring clients. The best factoring companies also provide dedicated account managers who understand your business goals. You can expect to receive a high level of customer service day in and day out.

In addition, the best factoring companies are members of the International Factoring Association and agree to engage in invoice factoring in adherence to the IFA Code of Ethics. Many also hold credentials with organizations like the Better Business Bureau and can provide references and excellent factoring company reviews for your peace of mind.