Question 1

What is Factoring?

Accepted Answer

The transaction where a business sells its invoices or account receivables to a third party financial company known as a "factor" is called factoring. The factor collects payment on those invoices from the sellers customers.  Factoring is also known as "AR financing" or account receivable financing.

Question 2

Why factoring?

Accepted Answer

The primary reason to factor is that businesses need cash on time to run their business, but their customers typically takes from 30 up to 90 days to pay on an invoice. Selling their account invoices to a factoring company helps them smooth out their cash flow. Trucking companies can pay their drivers and employees on time, take on more business, make timely payments on their other obligations and help them grow. 
​
If your business cash flow is not smooth, it is hard to retain good drivers, employees, it impacts the growth prospects of the business. Some customers offer quick pay but it is expensive and slow.

Question 3

What are the other benefits of factoring?

Accepted Answer

Beside improving your cash flow, following are additional benefits.
​
Businesses don't have to worry about a debt, because factoring is not a loan. As business expands, it can sell limitless amount of invoices, without worrying about getting more loans for business growth, or worrying about increasing credit lines to match with business growth.
Bad credit is not a problem for factoring as it is based on the quality of credit of businesses customers, not the business.
Factoring frees up a lot of time as collections headache is transferred to the factoring company, business can focus its time and energy to pursue new business.

Question 4

Who provides factoring service?

Accepted Answer

Hundreds of companies in united states are in the business of providing factoring services, but you have to decide what is the best factoring solution for your needs. Some factors compete on factoring fee rates, others on factoring service quality and customer service and yet others compete on providing customized solutions to your factoring needs. Businesses need to research what is best for their needs.

Question 5

Recourse vs. Non-recourse factoring?

Accepted Answer

Non-Recourse factoring allows businesses to sell their invoices and transfer the risk of payment to factor. If the invoices don't get paid, all the risk of collection is on the factor after the sale of invoices. This type of factoring is restrictive and expensive.
​
In recourse factoring the business is ultimately responsible for payment of invoices. If factor is unable to collect, business has to buyback the invoice so that the factor is made whole.

Question 6

What are typical contract terms?

Accepted Answer

Typical factoring contract is 1 year long with annual renewals. Every factor has a slight variation in the contract terms but typically there is an upfront factoring fee for each transaction. The advance rate is also outlined in the contract, typically factors advance 80% to 100% of the invoices minus the factoring fees, once the factor is paid on an invoice it pays the remainder of the invoice to client.

Question 7

What is credit Insurance?

Accepted Answer

Some debtors or customers that are not very well established may not be eligible for factoring for various reasons, such as, new in business, slow paying, adverse credit ratings etc. Such debtors can become eligible for factoring with credit insurance? Credit insurance is not required for all debtors.

Question 8

Do I need to factor all my invoices?

Accepted Answer

A business decide its cash flow needs, some businesses choose to factor 100% of their invoices for the convenience of it, other factor only slowest paying customers, yet others factor only as much invoices as they need to overcome their cash flow needs.

Question 9

History of Factoring?

Accepted Answer

Factoring is centuries old. The factoring started with international trade back in 15th century, originally in England. It became part of american business landscape as soon as the arrival pilgrims. It grew as an effective way to control cash flow without depending on bank loans. Now factoring is used by fortune 500 companies for billions of dollars in cash flow all the way to sole proprietors using factoring for few thousand dollars.

Question 10

How long does it take to set up factoring?

Accepted Answer

The set-up process for factoring is much faster than a loan process. It typically takes 24-48 hours to set-up factoring. Starting with initial contact to getting your money in your bank. It is typically as fast as you can respond with required documents for factoring.

FACTORING FAQs

What is Factoring? How does it work? Is it good for my business...and all the other common questions and answers about factoring.

What is Factoring and how it works?

Frequently asked questions