https://www.nerdwallet.com/article/small-business/factoring-company
Factoring companies provide financing to businesses that have cash tied up in unpaid invoices. Instead of offering traditional small-business loans, these companies buy outstanding invoices at a discount — giving you access to needed funds sooner.
Below, learn more about invoice factoring companies and how to choose the best one for your needs.
What is a factoring company?
A factoring company provides invoice factoring services, which involves buying a business’s unpaid invoices at a discount. The business gets a percentage of the invoice, say 85%, within a few days, and the factoring company takes ownership of the invoice and the payment process.
Once your client pays their invoice (directly to the factoring company), you get the rest of the money your business is owed (the remaining 15% of the invoice amount) minus the factoring company’s fees.
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How factoring companies work
What's it like to work with a factoring company? Here's an example:
Say you sell $20,000 worth of invoices to a factoring company and it agrees to buy them for $19,600, taking a 2% factoring fee of $400.
The company usually doesn’t give you the full value of the invoices upfront. Rather, it may give you 85% upfront — in this case, $16,660 — and once your customer pays the invoices, you’ll receive the remaining $2,940.
To make money, invoice factoring companies charge factoring or factor fees (sometimes also called discount rates). These fees tend to range from 1% to 5% of the total invoice amount.
The factoring fee you're charged typically depends on how much the invoice is worth, your business’s sales volume, how creditworthy your customer is and whether the factoring agreement is "recourse" or "non-recourse,” among other qualifications.
It’s important to note that if you have a recourse factoring agreement, your business is liable for the debt if your customer doesn’t pay their invoice. With non-recourse factoring, the factoring company assumes most of the risk if your customer doesn’t pay, but it charges a higher factor rate to do so.