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Factoring Company: What It Is and Best Options

Factoring companies buy businesses’ unpaid invoices and advance them a percentage of the amount owed upfront.
By Jacqueline DeMarco
Last updated on September 20, 2022
Edited bySally Lauckner

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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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Best factoring companies

Invoice factoring is typically offered by online lenders and fintech companies, many of which specialize in this type of business financing. Certain banks also provide factoring services.
If you’re looking for a place to start your search, consider these top factoring companies:

AltLINE

Best for: General small businesses
AltLINE works with a variety of small businesses, including startups and those with less-than-perfect credit histories.
The company offers advances up to 90% of the value of your invoices, with factor rates starting at 0.5%. Unlike some invoice factoring companies, AltLINE is a direct lender, which decreases the cost of borrowing with them.
AltLINE works with small businesses across a range of industries, such as manufacturers, transportation and trucking businesses, wholesale and distributors, staffing businesses and more.
You can get a free quote by providing basic information about your business on AltLINE’s website. After you’ve submitted a quote request, a representative will reach out within 24 hours to help you complete the application process. If you qualify, you'll receive fast access to funds.

FundThrough

Best for: Factoring invoices using accounting/invoicing software
FundThrough allows you to manage and factor your invoices using its online platform.
You can sync your QuickBooks Online account — or a similar software account — and choose which invoices to fund. If your software isn’t supported by FundThrough, you can upload invoices onto its platform.
The company offers two forms of factoring based on the size of your invoices, with advance rates of 100% (minus fees). Factor fees range from 2.5% to 7.5% and are priced based on 30-day payment terms.
You can sign up for a FundThrough account for free by providing basic information about your business, connecting your invoicing software and linking your business bank account. After you’ve applied, FundThrough will offer funding recommendations within one business day, but you’re under no obligation to take them.
FundThrough also acquired Bluevine’s factoring business in January 2022 and now services the lender’s former invoice factoring customers.

RTS Financial

Best for: Trucking businesses
RTS Financial is a well-known invoice factoring company for trucking businesses. The company also works with businesses in the distribution, staffing, textiles, manufacturing and oilfield services industries.
With RTS, you can access financing within 24 hours using a web-based portal to upload your invoices and manage your account online. The company does not charge ACH payment or invoice-uploading fees on factoring services and offers discounts for veterans.
Plus, because RTS specializes in the trucking industry, the company also offers a packaged fuel and factoring program that allows you to combine factoring, fuel and other trucking services for one price.
You’ll have to contact RTS for information regarding factor fees and advance rates because it doesn’t provide these details on its website.

ECapital

Best for: Fast invoice factoring
ECapital offers quick and flexible factoring services for a range of small businesses.
With ECapital, you receive access to proprietary account management software that allows you to manage your finances and submit invoices for payment. Once you’ve submitted an invoice, you can receive funds as fast as the same day.
ECapital allows you to factor invoices as large as $30 million and works with startups and established businesses.
You can get started with ECapital by completing a form on its website. After you’ve submitted the form, a representative will reach out within 24 hours to discuss your financing needs and walk you through the application process.
Reaching out to ECapital will also allow you to learn more about the company’s fees and advance rates because this information is not available on its website.

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.

How to choose a factoring company

If invoice factoring sounds right for your business, then you can research and compare factoring companies to find the best option for your needs.
As with any type of small-business financing, reviewing multiple options can help you make sure you’re getting the best terms and lowest fees.
When comparing invoice factoring companies, consider the following:

Types of companies they work with

It helps to work with a company that’s familiar with your industry and business model; many factoring companies specialize in trucking, for instance. If a company works with similar businesses, this experience can help ensure a smooth factoring process. Some questions to ask include:
  • What size companies does it typically work with?
  • What industries does it specialize in?
  • Do businesses need to meet certain criteria, such as time in business or a specific amount of accounts receivable, to work with it?

What their factoring process looks like

Find answers to these questions:
  • Is there a maximum or minimum number of invoices the company will fund?
  • Will it manage all of your accounts receivable, or will you retain control and decide which invoices to sell?
  • How quickly will you receive the funds?
  • What happens if a client fails to pay their invoice?
It’s important to understand the difference between invoice factoring and invoice financing, as you may come across both types of companies when looking for cash flow solutions.
  • With invoice financing, a business uses unpaid invoices as a form of collateral when pursuing a loan or line of credit. In this case, the business is still responsible for collecting payment.
  • With invoice factoring, a business sells its outstanding invoices to a factoring company at a discount, and that company is responsible for collecting payment.

Fees and other requirements

One of the most important details to consider is how much each factoring company charges. It will also likely have requirements that your business must meet to qualify for financing. Find the answers to these questions:
  • How much is the factoring fee or discount rate?
  • What percentage of each invoice will you receive as an initial advance?
  • Does the company require a personal guarantee?
  • What type of documentation (such as tax returns or financial statements) does the company require?

Is working with a factoring company right for my business?

Working with a factoring company can be a good idea if you need to manage cash flow issues or pay short-term expenses — especially if you can’t qualify for bank financing or need faster access to capital.
Compared with invoice financing, factoring can be a better option if you don’t mind giving up control of your invoices and trust the factoring company to deal with your customers professionally.
Some advantages and disadvantages of factoring:

Advantages of factoring companies

  • Speed up cash flow. If you need working capital to cover a cash gap when waiting for customers to pay their invoices, an invoice factoring company can step in to help.
  • Flexible payment terms for customers. If longer payment terms are keeping some of your best customers happy, you can keep your payment terms while keeping your business running smoothly.

Disadvantages of factoring companies

  • Expensive. Working with an invoice factoring company can be expensive because of its fees.
  • Loss of control. You also lose some control with your customer relationships because invoice factoring companies take ownership of your invoices and how they get paid.

Find the right business loan

If invoice factoring isn't right for you, check out NerdWallet’s list of the best small-business loans for business owners. Our recommendations are based on the market scope and track record of lenders, the needs of business owners and an analysis of rates and other factors so you can make the right financing decision.

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