It’s essential to evaluate different invoice factoring companies since they vary in size, expertise and income smoothing offerings. To make an informed decision, carefully consider their strengths, limitations and specialized services that align with your business needs. When a factoring company decides how much to pay for an invoice, one of the first things they look at is the debtor’s—the customer who hasn’t paid—creditworthiness. If they have good credit histories, the factor will be willing to pay a higher rate.

Invoicing shouldn’t threaten your business

With factoring receivables, a factoring company purchases your unpaid invoices and pays you a portion of the invoice value upfront. The advance rate varies depending on the company, but generally ranges from 75% to 100% — or the full invoice amount — minus fees. Understanding these components of accounts receivable factoring rates is essential for businesses to make informed decisions about whether factoring is the right financial solution for their needs. By carefully considering the process, fees, and real-world applications, companies can leverage AR factoring to improve cash flow and focus on core business operations.

Personal Credit Cards vs. Business Credit Cards

The factoring company buys your invoices/receivables at a discount and will advance anywhere from 60% to 80%  back to you right now. The remaining 20% to 40% is paid after your client completes payment in full, minus a discount fee that usually ranges from 1% to 7%, depending on the credit and risk profile of your clients. Invoice factoring is one way to use your outstanding invoices to access cash. Similar to factoring, invoice financing allows businesses to obtain a cash advance by borrowing against unpaid invoices. When you use accounts receivable factoring, your clients usually settle their invoices through the factoring company, so this means that they may be aware that your business is experiencing cash-flow issues.

How does factoring receivables work?

Invoice factoring can be a great option if you need money for your business quickly. Invoice factoring and invoice financing are two different ways to receive the funds for an invoice before a client pays. Let’s say a business has $100,000 in eligible accounts receivable and the advance rate is 80%. The factoring company then holds the remaining amount of the invoice, typically 8 – 10%, as a security deposit until the invoice is paid in full. Then the factoring company collects money from the customer over the next 30 to 90 days.

How Electronic Invoicing Drives Efficiencies, Wows Customers, and Improves Cash Flow

Factoring involves selling invoices, while AR financing uses invoices as collateral for a loan. Each has its own set of pros and cons, and the choice between them depends on your specific business needs and circumstances. Growing businesses that don’t have the time or credit to get a bank loan often turn to invoice factoring. It can help improve cash flow and revenue stability but can also help fund operations or pursue growth opportunities.

The factor collects payment from customers, and the company receives funding without waiting for payment or taking on additional debt. Invoice factoring companies charge a factoring fee or rate when purchasing your invoices. The average cost of invoice factoring is 1% to 5% of the total invoice value.

ECapital doesn’t a small business owner’s guide to double clearly disclose its rate structure, but does offer free quotes for factoring receivables. ECapital allows for invoices with up to 90-day payment terms, and businesses can get paid the same day they submit an invoice. Aside from the advantage of getting cash upfront, accounts receivable factoring is also commonly employed as a strategy to transfer payment risk to another party (in this case, the factoring company). Factoring is typically more expensive than financing since the factoring company takes responsibility for collecting on the invoice. In the case of non-recourse factoring, they also accept the losses if the invoice goes unpaid.

This flexibility is another reason many borrowers might be willing to pay a premium. Many, or all, of the products featured on this page are from our advertising partners who compensate us when you take certain actions on our website or click to take an action on their website.

1. Say your small business needs $20,000 to replace some necessary equipment quickly, but you don’t have the working capital to do so.
2. Aside from the advantage of getting cash upfront, accounts receivable factoring is also commonly employed as a strategy to transfer payment risk to another party (in this case, the factoring company).
3. If your customer pays within the first month, the factoring company will charge you 2% of the value, or $1,000.
4. The choice between recourse and non-recourse factoring hinges on the business’s risk appetite, the price their willing to pay, and its clients’ credit histories.

Business lines—or operating lines—of credit are another commonly used form of post-receivable financing. This just means it’s financing after an invoice has been generated (purchase order financing is the inverse; it’s a form of pre-receivable financing). From replacing equipment to paying bills, running a small business requires money—but you may not always have the cash flow when you need it. When choosing the best accounting software for small business, you want a program that tracks expenses, sends invoices and generates financial reports. All else being equal, regular, recourse, and notification deals are less risky for a lender (or a factoring company); non-recourse, non-notification, and spot deals are more risky. You don’t need to be an accountant to understand the importance of cash flow management.