Invoice factoring is a special kind of financial transaction in which a business would sell some or all of its invoices to a factoring company. The factor would provide approximately 80% of the face value of those invoices to the business owner, and assume ownership of those invoices. After collecting the invoice amounts from the business customers, the factor would then remit the other 20% to the business owner, after subtracting factoring fees. The big advantage of this transaction is that it puts immediate cash in the hands of the business owner, so it won’t be necessary to wait 30, 60, or 90 days for customers to pay on the invoices.

Which Factoring Company to Choose

It can make a huge difference in which factoring company you choose since terms and rates will be different among all factors. You’ll also be obliged to sign a contract with that factoring company so that you’re committed for a year or more. In order to find the factoring company which is right for your small business, you should consider a few key factors.

First of all, you should find a factor which will allow you to sell the number of invoices you really want to. In some cases, you may want to sell a single invoice for a large amount, and in other cases, you may want to sell all your invoices to the factor. There will be a significant difference in arranging for these two types of factoring because there will always be a higher rate associated with selling single invoices or just a few.

Another aspect which you should consider is arranging for either recourse or nonrecourse factoring. In recourse factoring, when your customers fail to pay the invoice amount to the factor, you could be held responsible for making that payment. This of course favors the factor, and for that reason, it’s generally easier to obtain than nonrecourse factoring. In non-recourse factoring, you cannot be held responsible for lack of customer payments, but the fees for obtaining this kind of factoring will always be higher.

Thinking of Invoice Factoring for Your Small Business?

Invoice factoring can be a great way of maintaining a positive cash flow for your small business. Contact us at Coastal Commercial Lending if you’re interested in becoming involved with invoice factoring.