Factoring Receivables: Everything You Need to Know

Updated on June 4, 2020
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What is Receivables Factoring?

Factoring receivables is the selling of accounts receivables to free up cash flow. When factoring receivables, the business will receive an advance that’s typically 80% of the invoice amount at the point of purchase. Once the invoice is collected, the business owner gets the remaining 20% less a fee.

Factoring receivables is a way to free up cash flow that’s held up in your unpaid invoices. Typically, the company will collect the payments on the business’s behalf.

We’re going to go over using factoring receivables to fund your small business in detail in this guide. We break down everything you need to know about this type of small business loan so that you can decide whether or not it’s the right move for your business.

What Is Factoring Receivables?

When you decide to use accounts receivable factoring, you’re essentially choosing to sell your outstanding invoices. You’ll apply to an accounts receivable factoring company to buy your business’s outstanding invoices, or accounts receivable. In some cases, the factoring company will take on your debt, and collect from your customers on your behalf, for a fee.

If you decide to go with a factoring receivables company it can end up working great for you and for them. You don’t have to deal with the stress of collecting from late-paying customers and the factoring company gets to charge a premium for their funding and collection services.

The Math Behind Accounts Receivables Factoring

Let’s look more closely at how accounts receivable factoring works. After all, you want to be 100% comfortable with the process and be aware of how it will work for your business.

Accounts receivable factoring companies will buy your receivables for 50% to 90% of the total invoice value. Then, your customers will pay their invoices, in full, directly to the factoring company.

Lenders will typically take a processing fee, usually around 3%, on the invoice amount. They’ll also charge a “factor fee” each week until the invoice is paid, usually around an additional 1%.

Note that some lenders offer “non-recourse factoring,” meaning that they assume the credit risk of non-payment. Other lenders reserve the right to “recourse” on bad debt, meaning if your client does not pay, they will ask you to repurchase the invoice. The lines can get a bit blurry here, so make sure to check the fine print.

    Accounts Receivable Factoring Example

    To get a better picture of how accounts receivable factoring works, here’s a real-world example of a factoring transaction:

    Say you have $200,000 on an outstanding invoice with 30-day terms. If you’re like any other small business owner, you’re probably too busy to collect your outstanding invoices, but you also can’t afford to get behind on your cash flow.

    To take your unpaid invoice off your hands, you approach an accounts receivable factoring company. The factoring company buys your outstanding invoice for 85% of the invoice value and holds the remaining 15%, meaning you’ll see $170,000 in your bank account while the lender keeps $30,000.

    Right off the bat, the lender charges you a 3% processing fee, or $6,000. It takes two weeks for your customers to pay up, so you end up paying a 2% factor fee—or $4,000. The lender keeps $10,000 of the $30,000 reserve, and you’ll get $20,000 back.

Accounts Receivable Factoring Companies

Now that you’re familiar with the fundamentals of factoring receivables for small businesses, you’ll have to decide which factoring company will be best for your small business.

When searching for a factoring receivables company, it’s important to find a good match and terms you completely understand.

Here’s a closer look at a couple of the best accounts receivable factoring companies you can use for your invoice factoring needs.

BlueVine

BlueVine is an online lender that offers simple, transparent terms for business owners who have irregular cash flow or payment cycles. By advancing your small business cash in as little as one day, BlueVine offers a fast and convenient factoring solution for businesses looking to factor their outstanding invoices.

Once you sign up for a free BlueVine account, you can connect it to your invoicing or accounting software—like QuickBooks, Xero, or FreshBooks. When you factor with BlueVine, your first advance will probably be approved in just one day, and your next advances will be approved in minutes. BlueVine’s typical advance rate is 85% of the invoice amount.

Be aware that BlueVine doesn’t factor past-due invoices. Their factoring is a little different in that businesses in good standing retain control over the invoices instead of BlueVine taking it on for you. This can be a pro for business owners who don’t want their clients to know they’re seeking financing, as well as those who want to retain control over their client relationships.

    Pros

    • BlueVine offers financing for all entity types.
    • BlueVine does not require a minimum average bank balance to be eligible.
    • BlueVine can fund loans in zero to three days.
    • On average, though, BlueVine can fund your application in 24 hours.

    Cons

    • They do not work with business-to-consumer models.
    • They also do not work with businesses in the medical, gambling, or adult entertainment industry.

Triumph Business Capital

Another option you have for your factoring receivables is Triumph Business Capital. They work with businesses to take on their invoices and offer up to 90% of the value of the unpaid invoice. They do actually take on the job of getting customers to pay off the invoices and as such, will act as the collector.

You as a business owner would send your invoices to Triumph and within 24 hours they would deposit the sum into your account and then handle the collection of the payment for your business for a fee.

    Pros

    • Triumph works with businesses in industries like government contractors, oil and gas companies, staffing companies, and more.
    • They pay you within 24 hours usually of receiving your invoice.
    • They specialize in factoring.

    Cons

    • They will check your credit score and report to the credit bureaus.
    • There are minimum requirements to work with them.

Fundbox

Whenever you need to access funds, you can simply click to clear an unpaid invoice—Fundbox will automatically advance the full amount to your bank account.

Fundbox is a little different than other factoring companies because they will advance you the full amount of the invoice, rather than just a percentage, which means that businesses repay principal, transaction fees, and advance fees in 12 weekly payments. Or, if you’re able to, you can pay off the principal early and avoid the remaining fees.

Additionally, Fundbox won’t interact with your customer or act as a payment collector; they’re technically a financing company not a factoring company as they don’t take over control of your invoices, but they are worth considering. So if you aren’t comfortable with a factoring company coming in between you and your customer, Fundbox might be the right option for you.

    Pros

    • Fundbox can work with any entity type.
    • Fundbox can fund an application in one to five days. On average, Fundbox funds applications in one day.
    • Fundbox does not report to the personal credit bureaus or the business credit bureaus.

    Cons

    • They don’t work with businesses that don’t invoice their customers.
    • They also don’t work with businesses that sell B2C

Advantages and Disadvantages of Factoring Receivables

The Advantages

Invoice factoring is a great option for some companies, but it isn’t always the right solution for your small business.

Before you commit to a factoring receivable agreement, be sure to weigh the pros and cons of invoice factoring.

Accounts receivable financing will have different benefits for different companies, but in general, here are the primary advantages:

    Fast Access to Cash

    There will come a time in the lifespan of your small business when you’ll need a quick infusion of working capital. You might need to cover unexpected costs, or seize a new business opportunity before time runs out. Luckily, there are a few business loans for you to consider.

    Factoring receivables is one of them. Every situation will be different, but you can sometimes get funds in exchange for your outstanding invoices within one business day.

    Traditional business loans—especially bank loans—can take several weeks to be approved. If you’re in a time crunch and you need cash from your invoices as soon as possible, factoring might be preferable to a traditional bank loan. Bank loans, though, involve one less party since they’re just between you and your lender.

    Invoices Serve as Collateral

    Invoice factoring is technically a type of asset-based loan. An asset is a thing your business owns—a piece of equipment or machinery, a vehicle, or a selection of your inventory. With the traditional small business loans that you’re probably most familiar with, lenders determine what you qualify for based on your borrowing and business history—like your credit score, tax returns, bank statements, and more. With asset-based lending, lenders rely on the value of the asset, which acts as collateral for the loan.

    What does this mean for your business? With factoring receivables, you won’t need to put up any extra collateral for your loan. If something goes wrong, the factoring company can always collect on the invoice to recover their losses.

    Easier to Qualify For

    When applying to traditional small business loans, you almost always need to provide a lot of information and documentation about your business before you’re approved. Without fail, lenders will scrutinize your personal credit score, financial health, and business history. So if you have a less-than-ideal credit score or you haven’t been in business for a long time, you won’t be eligible for many of the small business loans out there.

    With factoring receivables, lenders are really only concerned with your outstanding invoices. They’ll want to make sure that taking on your accounts receivable is a smart investment. But otherwise, lenders don’t care as much about your credit rating or business history—making invoice factoring a great option for small businesses that don’t qualify for other loans.

    Ability to Outsource Invoice Collection

    Not every factoring company will take on your debt and collect your accounts receivables for you. But, the ability to outsource your collection can be a big advantage for a lot of small business owners.

    If your business is having a particularly busy season, you may not have time to reach out to late-paying customers over and over again. Or, you might run a very small business and you don’t have the internal manpower to collect invoice payment in an efficient manner. If a factoring company takes over the collection of your accounts receivables, you can focus on the other parts of your business that are more important to your success.

The Disadvantages

When you’re considering any small business loan, you should be aware of the potential downsides to the business financing option. The same goes for invoice factoring.

Here are some disadvantages associated with invoice factoring:

    Higher Fees Than Traditional Financing

    As small business loans go, accounts receivable financing is an expensive way to finance your business. With factoring, you can get access to money in a hurry. However, fast cash is expensive cash, and invoice factoring is no exception.

    Accounts receivable factoring will come attached with some of the highest fees around. When you take the 3% processing fee and the 1% per week factor fee, you’re looking at paying at least 4% for money lent for a short period of time.

    These fees are steep, but if you’re tired of waiting on your customers and you need money to meet payroll or to pay off your suppliers, invoice factoring could be worth the price.

    Before you commit to a factoring agreement, though, be sure you fully understand the factoring rates, fees, and other costs. To check these details out, be sure to use an invoice financing calculator.

    Giving up a Portion of Your Profits

    Invoice factoring isn’t that complicated of a process: You receive instant money for your outstanding invoices in exchange for a portion of your profits.

    Whenever you use invoice factoring, you won’t fully receive what your customer owed you originally. If your customer owes you $100,000 on an invoice, you’ll part with at least $4,000.

    The question to ask yourself before you commit to accounts receivable factoring is: Are you willing to part with $4,000 to access the other $96,000 right now?

    If the answer is yes, then invoice factoring could be right for you. If you aren’t as willing to give up any of your profit, then you should pursue other forms of business financing.

    Slow-Paying Customers Impact How Much You Owe

    Another downside of factoring receivables is that the longer you have to wait for your customer to pay the invoice, the more you will owe the factoring company—typically, your factor fee will be 1% each week the invoice is outstanding. So if it takes a customer six weeks to pay, you’ll end up paying 6% in factoring fees.

    If you’re confident your customers will pay up in one or two weeks, then the factoring fee won’t hurt too much—especially if the invoice is large in the first place. But, reviewing how quickly your customers have paid in the past will help you decide whether invoice factoring is the right move for your business. It will also help you decide which client invoices to sell. In general, it makes the most sense to sell invoices associated with customers that usually pay quickly and in full.

    When a factoring company takes over the collection of your invoices, don’t be surprised if the company wants to know where your customers’ credit scores stand. Lenders won’t want to advance you cash if they have reason to believe that your customers aren’t likely to pay their invoices.

    Customers Are Aware That Your Business Is Factoring Receivables

    Before you commit to an accounts receivable factoring agreement, make sure you’re comfortable with inviting a third-party company into your relationship with your customers. If a factoring company takes over the collection of your accounts receivables, there’s no hiding the fact that you’ve entered into a factoring agreement. This might indicate to the customer that you’re having financial trouble.

    You might not see much value in continually late-paying customers anyway, but what about your other customers? Word might get out that your business is struggling, and you might lose existing customers or scare off future ones.

The Bottom Line

Accounts receivable factoring can be a fast and effective way to solve your cash flow issues and grow your business.

Before you jump into an invoice factoring agreement, be sure that this financing solution will improve your financial situation and provide long-term business success. Now that you have this guide on hand, you’re equipped to make an informed decision.

If you think account receivables factoring is the perfect option for financing your business, Fundera can connect you to the best lenders out there.

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Vice President and Founding Editor at Fundera

Meredith Wood

Meredith Wood is the founding editor of the Fundera Ledger and a vice president at Fundera. She launched the Fundera Ledger in 2014 and has specialized in financial advice for small business owners for almost a decade. Meredith is frequently sought out for her expertise in small business lending. She is a monthly columnist for AllBusiness, and her advice has appeared in the SBA, SCORE, Yahoo, Amex OPEN Forum, Fox Business, American Banker, Small Business Trends, MyCorporation, Small Biz Daily, StartupNation, and more. Email: meredith@fundera.com.
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