How to Choose the Best Invoice Factoring Company

Invoice factoring is a beneficial option for businesses in most industries extending credit terms to their business customers. It is a great way to increase your cash flow without taking out a bank loan or a line of credit.

However, because you are dealing with cash, it is important to be sure the factoring company you choose to work with is professional and reputable. Different companies are best suited to different industries and businesses, so take the time to research what factoring company is right for you and your business. Not all factoring companies offer the same services for their pricing, so make sure you are comparing apples to apples when researching the best invoice factoring companies.


Table of Contents

Are you new to factoring?

To choose a company we first need to understand what factoring is, how it works, and how it can benefit your business.

  1. What is Invoice Factoring?
  2. How Does Factoring Work?
  3. How is Factoring Beneficial to Businesses?


Ready to factor?

We recommend asking the following questions when looking for a factor:

  1. What Are Your Fees?
  2. What Is Covered in These Fees?
  3. Is Credit Protection Covered?
  4. How Quickly Will I Receive My Funds?
  5. Are There Any Hidden Fees?
  6. How Would You Describe Your Company Culture?
  7. What Is The Approval Process?
  8. Final Review


What is Invoice Factoring?

Factoring is short term business credit where you enter into an agreement with a Factor to sell your invoices (receivables) to them at a discount percentage.

Learn more about what invoice factoring is


How Does Factoring Work?

Once you have completed your service and/or delivered your product to your business customer, you will submit your invoice along with any backup documentation to your factor. Your factor will then advance you 75%-95%, usually within a 24-hour period. Your customer will remit funds to your factor for these invoices. Your factor will then give you the remaining percentage less their fee.

Learn what happens after you’ve signed your contract with your factoring company.


How is Factoring Beneficial to Businesses?

Factoring is beneficial to companies because it allows them to get restriction-free cash flow almost immediately. Smaller companies or companies with less than stellar credit can benefit from factoring as well because the criteria is based off of your customers’ ability to pay – not yours.

Learn more about why invoice factoring is beneficial.


Once you understand what factoring is and how it can help your business grow, you are ready to choose an invoice factoring company to work with. Not all factors are the same, so be sure to take the time to research and ask the right questions before you sign a contract. We recommend asking the following questions when looking for a factor:

  • What Are Your Fees?
  • What Is Covered in these Fees?
  • Is Credit Protection Covered?
  • How Quickly Will I Receive My Funds?
  • Are There Any Hidden Fees?
  • How Would You Describe Your Company Culture?
  • What Is The Approval Process?


What Are Your Fees?

Although this is usually the first question asked, we feel it should be the last one asked after all the others. Why? Once someone hears a rate, they don’t always take in what that rate (fees) covers. If they feel it’s too expensive, they move on to another company offering a lower rate.

However, not all factoring companies offer the same services and coverage, so you might think you are getting a better deal with one company, when in reality you are not. This is because factors who charge a higher rate are often covering multiple services for that rate, not simply funding an invoice you will be liable to pay back.

You also might end up paying more than just fees if your Non-Recourse Factor accepted payments on your behalf for delinquent invoices within 90 days of an account debtor filing for Bankruptcy protection. Preferential Debt Payments in Bankruptcy, “Why your invoices must be paid within terms”.

As a small business owner, you might know the feeling of having been outbid by other companies offering less service and/or an imperfect product. The same goes for factoring companies; rates should be based on service, coverage, and the knowledge and stability of the factoring company. If you are getting a very low rate, you could also be getting a low quality of service and coverage.

Depending on the industry and services covered, factoring fees will vary in range from 1%-10%. This is normally a scaled percentage based on days.

Example: If a factored invoice pays at 30 days, your factoring fee could be 2.5% of the invoice value. $2000.00 invoice would cost you $50.00 if it paid at 30 days.

Factoring Advance Rates will also vary depending on industry and the evaluation of your account. Typically, advance rates are anywhere from 75%-95%. This advance rate might also have a bearing on your fee pricing.


What Is Covered In These Fees?

This is an extremely important question that is left out most times. Most think that all factoring companies are the same, they are not. Be sure to take the time to research and consider what services and coverage you get for the price you are paying. Our recommended questions, should get you the answers for this assessment.


Is Credit Protection Covered?

This is not always the case. There are Recourse and Non-Recourse Accounts. Make sure you ask if yours is Recourse or Non-Recourse.

Finding out if you have a Recourse or Non-Recourse account is the difference between you being responsible for paying an invoice back to a factor if your customer doesn’t pay within a specific time frame or not.

Look for companies that offer free credit checks and risk assessment analysis on all invoiced customers wishing to do business with your company. This measure allows you to avoid the risk of not getting paid from your invoices. Credit Protection by itself is costly, consider this cost when comparing fees between factoring companies.


How Quickly Will I Receive My Funds?

Once you submit an invoice with back up documents to a factoring company, they will typically advance you a percentage of that invoice value within 24 hours. While this is certainly better than waiting to receive payment from a 30-day payable, it still isn’t fast enough for many thriving businesses.

Instead look for factoring companies that can submit your funds within a 30 minute to 2-hour window upon receipt of proper paperwork. Ask if there is an additional fee for same day funding.

Some Factors offer pay within 24 hours, but in reality, they must verify an invoice before funding. This can not only cause delays on your end, but it can also disrupt your customer.

Some Factors verify every single invoice before funding. Do you want your customers subjected to all these verifications? Try to find companies that only require verification if important paperwork is missing from the initial receipt or if the invoices are high dollars. This will save your customers from multiple verification requests and give you rapid access to capital to run your business the way you see fit.


Are There Any Hidden Fees?

Factoring companies routinely lure uninformed businesses into agreements with a low factoring rate. However, these contracts can include a number of hidden fees which can include:

  • Same Day Funding
  • Credit Checking
  • Interest
  • Fee Per Invoice
  • Administration Fees
  • Non-Factored Fees

Be sure you look into all the fees you’ll be expected to pay prior to entering into any kind of agreement with a factoring company. While initial prices for some companies may seem much lower, you could end up paying more in the long run due to undisclosed fees or charges hidden in the fine print.


How Would You Describe Your Company Culture?

One of the benefits of working with a factoring company is that the company essentially becomes part of your finance and collections department. Because of this, it is imperative that the company offer good customer service to not only you, but your customers as well.

If the factoring company you are speaking with has limited resources, inadequate staffing, or long wait times for phone calls or emails, that is typically not a good indicator that they offer good customer service.

Look for a company with a long-standing management team and office staff. The longer your factoring company’s employees have been with the company, the more industry experience and knowledge they will have to offer you. Also, look for companies who have dedicated customer service teams available during business hours, both by phone and email.


What Is The Approval Process?

Most factoring companies only approve prospective clients with good credit. They will also secure all of your company’s and officer’s assets for their own security. This can lead to future complications as your business grows.

For example, some factoring companies can place a blanket UCC-1 on all your assets. This can prevent you from securing important loans you may need to expand your business or fulfill future equipment or a leasing loan.

Using your assets as security ends up being very similar to acquiring a business loan instead of invoice factoring. Instead, look for companies that don’t secure or tie up all your assets.

Also, find companies that don’t qualify customers based on their personal or business credit scores. Factoring companies should help your business operate efficiently, not constrain it.


Final Review

After looking at all of this and the needs of your business, review the rates each company is charging and compare it to the services and contract they offer you. You should be able at that point to tell which company will be most beneficial to your particular business need and which will benefit your company the most.

A factoring company, just like any service you purchase for your business, has to be the right fit for your company and your business goals. There are many different elements to consider when choosing which factoring company will be right for you.

Be sure to take the time to research and consider what services you get for the price you are paying. Remember, the company you choose will reflect on your business, so put as much time into the decision as you would if you were making a new hire.


Are you interested in learning more about UC Factors to see if we are the right fit to help your company see growth and increased cash flow?

Reach out to use today to learn more.

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