Business Services: What is a Factoring Company?

A factoring company specializes in financing invoices from businesses that have cash flow problems due to slow-paying customers. Factors don’t lend money. Instead, they purchasethe accounts receivable from their clients at a small discount. The client gets immediate funds for the receivable, and the factor makes a small gain when the invoice is paid in full.

Products

Most factoring companies offer invoice factoring as their only product. Factors can work with companies in most industries, with few exceptions. Some factors are generalists, while others customize their offerings to serve specific industries such as medical, construction, or transportation.

Industries that use factoring

For the most part, factoring can be used in any industry where goods or services are sold and paid for in net-30 to net-60 day terms. The following businesses and industries regularly use factoring:

• Trucking
• Freight brokers
• Owner-operators
• Business services
• Staffing agencies
• Manufacturing
• Wholesale
• Janitorial
• Technology
• Courier services
• Security services
• Consulting
• Call center operators
• Cell tower construction and maintenance

• Medical offices
• Diagnostic centers
• Private investigators
• Oilfield services
• IT consultants
• Landscaping
• Property preservation
• Import
• Office supply
• Distributors
• Food service
• Logistics
• Advertising
• And more

Advantages of working with a factoring company

The most important advantage of working with a factor is that your cash flow improves, often immediately. You don’t have money tied up in slow-paying accounts receivable. Instead, you have cash-at-hand to pay expenses and take on new deals.

Additionally, factoring providers can also:

• Work with small businesses and start-ups
• Work with businesses whose only assets are invoices
• Work with  business owners who have bad credit
• Provide quick decisions
• Increase financing lines with minimal underwriting – often the same day

Is a factoring company right for me?

Usually, factoring financing helps your business if the following is true:

1. Your commercial or government clients pay in net-30 to net-60 days
2. Your commercial clients have good credit, and
3. Slow payments are causing cash flow problems

If items 1- 3 apply to your company, financing your invoices will almost certainly help improve your cash flow.

How does invoice factoring work?

Transactions are fairly simple and are structured as the purchase of your receivable in two installments. The first installment, the advance, is deposited to your bank account as soon as you sell the invoice. The advance varies by industry but ranges from 70% to 90% of the gross value of the invoice.

The second installment, the rebate, is deposited to your bank account as soon as the invoice is paid in full by your customer. Your client pays on their regular schedule and does not need to pay sooner. The rebate covers the 10% to 30% that was not initially advanced, less the financing fee. To learn more about factoring transactions