The basic steps
You do the work and invoice your customer as usual. You submit that invoice to the factor. The factor verifies it and advances a portion of its value, often within a short time once your account is set up.
Your customer pays the factor on the normal due date. The factor then releases the reserve, which is the part it held back, minus its fee. The fee usually depends on how long the invoice takes to pay and your volume.
Recourse vs. non-recourse
With recourse factoring, if your customer never pays, you have to buy the invoice back or replace it. It is the more common structure and usually costs less.
With non-recourse factoring, the factor absorbs the loss if the customer can't pay for a covered reason such as insolvency. It costs more, and the protection is narrower than many owners assume; a dispute over the work itself is usually still on you. Read the definition in the agreement.
Who factoring fits
Trucking companies, staffing firms, manufacturers, distributors, contractors and other businesses that bill creditworthy customers on terms. It is especially useful when you're growing faster than cash comes in, or when a large customer pays slowly.
It does not fit businesses that sell to consumers or get paid at the point of sale, because there are no business invoices to buy.
What to compare before signing
Look past the headline fee. Ask about minimum volume, contract length, termination fees, whether you must factor every invoice or can choose, how disputes are handled, and how the factor contacts your customers. An A/R line of credit is a close cousin: you borrow against receivables instead of selling them, which some businesses prefer once they're more established.
A simple example of the flow
Say you deliver a load or finish a job and bill a customer who pays in a month or two. Instead of waiting, you send the invoice to the factor that week. After verifying it with your customer, the factor advances most of the face value to your account. When the customer pays the factor on the due date, the factor sends you the rest, keeping its fee. The work and the customer relationship stay the same; only who receives the payment changes.
Expect the factor to ask for an accounts receivable aging report, a customer list, sample invoices with proof of delivery or completed work, and your entity documents. It will check your customers' credit and may file a lien on your receivables. If another lender already holds a blanket lien, that lender may need to agree first.
Factoring vs. an A/R line of credit
| Invoice factoring | A/R line of credit | |
|---|---|---|
| Structure | Sale of invoices | Loan secured by receivables |
| Who collects | Usually the factor | Usually you |
| Approval leans on | Your customers' credit | Your business and receivables |
| Typical fit | Growing or newer businesses | More established businesses |
Common questions
Will my customers know I'm factoring?
Usually, yes. In most arrangements customers are told to pay the factor directly. Some programs offer non-notification structures, but they are less common and often require a stronger file.
Is factoring a loan?
Generally not. Factoring is usually structured as a sale of your receivables rather than debt. That's why your customers' payment history matters more than your own credit score.
Can a new business use factoring?
Often, yes. Because the decision leans on your customers, factoring is one of the more accessible options for young businesses that bill established companies.
Related
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General education, not legal or tax advice. Requirements, terms and timing vary by lender and program. Capco Capital is a commercial lending advisory firm operated by Capco Capital LLC. We arrange financing through third-party lenders as a loan broker and are compensated by the lender when a loan funds. We are not a lender and are not affiliated with the U.S. Small Business Administration.
