Invoice factoring is a financing option available for B2B companies experiencing cash flow problems due to extended payment terms or late-paying customers. Essentially, you can sell your open accounts receivable invoices at a discounted rate (usually 70-90%) to a provider, known as a factoring company. The factoring company, or factor, will then collect the payments from your customers, deduct any fees for the service and forward any remaining balance to you.

The advantages of factoring are that you can receive cash almost immediately upon billing, and you could save time by no longer having to chase down payments from your customers. If invoice factoring sounds like a solution that could work for you, it is vital to know all of the aspects involved so that you can choose the factoring company that can best suit your needs.

Invoice Financing vs. Invoice Factoring: Invoice financing is a business loan that uses a company’s debt ledger as collateral. Factoring is an asset sale, and with a few exceptions, there is generally no repayment necessary.

Whole Ledger vs. Spot Factoring: Whole ledger factoring is a contract and the sale of most or all customer invoices. With Spot Factoring, a business may choose which invoices to sell, often without long-term commitments.

Non-Recourse vs. Recourse: Non-recourse factoring releases a company from liability if the client does not pay the factored invoice. Recourse factoring is typically more affordable; however, the business owner will be responsible for any amount, plus costs, of unpaid invoices.

Flat Fee vs. Variable Fee Structure: Flat fees are determined as a fixed percentage of an invoice’s amount. Factored invoices with variable fees will accumulate more charges the longer it remains unpaid.

Other Fees and Penalties: Be alert to the potential for a factoring company to have costs additional to the initial flat or variable factoring fees. These can include:

• Maintenance fees to keep your account open
• Monthly fees for falling below an agreed minimum of factored invoices
• Due diligence fees for customer credit verification
• Early termination fees for canceling long-term contracts

The most significant factor for determining costs and advances is the creditworthiness of the customers whose invoices you wish to factor. The better your customers’ payment habits are, the less risk there is to the factoring company so you may obtain better rates. Some other indicators are the type of service you offer, the number of invoices you wish to factor and your payment terms.

With all of these considerations in mind, investigate the fine print of the factoring companies with whom you wish to work. Your due diligence could help you secure the best deal with the right factor for your company.