How to Choose an Invoice Factoring Company

A customer issues an invoice with net terms once a product or service is delivered or completed.

The company sells the invoice to an invoice factoring company to access working capital.

Once the invoice is verified, the factor advances a portion of the invoice amount to the company. The rest if held in reserve.

The fast payments provide the business with cash on hand. They can buy inventory, add new customers, pay employees, and grow the business.

Once the customer pays the outstanding invoice at the end of the payment terms, the business receives the remaining funds, minus a small factoring fee.

Invoice factoring: As mentioned above, invoice factoring is the process of a business selling its accounts receivables at a discount to receive an advance on an unpaid invoice. Invoice factoring is a debt-free form of financing because your cash advances are dependent on the invoice you submit.

Invoice financing: Businesses don’t sell their accounts receivable but instead use them as collateral to qualify for a loan with invoice financing. The loan amount is dependent on the strength of your business invoices.

Non-recourse: Business owners are not liable for a customer failing to pay an outstanding invoice. This is riskier for the factor, and the fees are typically higher because of that. The factoring company won’t accept invoices from customers with bad credit.

Recourse: The business owner takes on the risk of a customer failing to pay an invoice. The business is responsible for paying the factoring company the total invoice amount if a customer doesn’t pay. The fees tend to be lower as there is less risk for the factoring company.

Spot factoring: Spot factoring involves no long-term contract as it’s factoring a single invoice on a one-time basis. Fees tend to be higher.

Whole ledger factoring: A business must submit all client invoices when using whole ledger factoring. Fees are lower, but there is usually a high cancellation fee if a company wants to terminate the contract before the term is up.

Minimum requirement fees: Some factors make businesses meet a minimum monthly requirement of invoices per month. If they fail to make the minimum, the factor will charge an additional fee.

Termination fee: Some factors will charge a hefty cancellation fee for terminating a contract before the terms are up.

Due diligence fees: Some factors will charge an additional fee for verifying a client’s background to ensure they are in good standing.

How quickly will you be approved and have access to funds? Porter Capital approves you in as little as one business day, and  you can start factoring immediately.

Have clients left good reviews? It’s always important to see what past and current clients say, as they are the ones in your shoes.

Do they have good customer service? There’s nothing worse than working with a factor that has bad customer service, especially when the relationship involves your money.

What is the advance rate? This involves your cash on hand, so you must be comfortable with what you receive.