Factoring 101: How do factoring companies work?Posted by Lynn Chen on February 23rd, 2021 Invoice factoring is a unique service that differs significantly from other cash-flow financing. Factoring companies specialize in invoice factoring or purchasing outstanding invoices from businesses that have slow-paying customers and are looking to boost cash flow. This type of financing allows businesses to access cash immediately after issuing an invoice instead of waiting 1-3 months for customers to pay. Once they purchase a company's invoices, they collect directly from the business's customers. How it works When a business factors their invoices, the factoring company advances up to 90% of the invoice's value to the company. Once the factor has collected the full payment from the end customer, they will return the remaining 10% to the company, minus a factoring fee. That fee typically ranges between 1% and 5% depending on multiple factors. Factoring companies generally calculate these fees based on the following elements: 1. The amount of money being factored: As with any business, economies of scale are at play for factoring companies as well. invoice factoring company Many costs associated with establishing and maintaining a factoring relationship are fixed in nature, which means the more a factoring client utilizes its line, the lower their rates will be. 2. The length of your invoice terms: Factoring companies may charge higher rates for invoices with longer payment terms, as they will advance cash to your business for an extended period. That time has value to the factor. 3. The credit quality of your customers: Your customers will be the ones paying the invoices you factor, which is why the factoring company will want to ensure that your customers are good for the money. Better credit will result in lower factoring fees and vice versa. Factoring is not a loan—it is a purchase of assets (i.e., your invoices). Therefore, you do not incur debt, and your agreement and use of the line do not affect your credit score (aside from the impact from the initial credit check). To learn more about invoice factoring and how it can help you solve cash flow problems and deliver efficient business funding answers, contact Charter Capital today.Like it? Share it! |