Factoring: What It Is and How to Choose a Service

By Sara Angeles, Business News Daily Staff WriterAugust 23, 2016 07:36 am EST

Choosing a factoring service doesn't have to be complicated. Here are three things to consider when selecting one for your business:

  1. What type of factoring does your business need?

  2. How much of your outstanding invoices do you need funded and when do you need it?

  3. How much are you willing to pay?

We will help you answer these questions below, but if you already know what you need and just want to see our recommendations for the best factoring service. 

The first step to choosing the right factoring service for your business is figuring out which type of factoring you actually need. For instance, do you need a factoring service that covers all of your outstanding invoices upfront, or will a partial payment suffice? Do you prefer to keep receiving payments from customers, or will you hand collections over to the factoring company? And do you want to be held responsible to the factoring company if customers don't pay? These are just some of the considerations we'll cover below.

First, to help you better understand the many different types of factoring, here is an explanation of how factoring works, followed by a breakdown of the most common factoring services.

 

How factoring works

Factoring is an alternative method of financing that allows business owners to sell their invoices, or accounts receivable, to a third party, the "factor." Factoring helps to fuel growth by providing the funds necessary to keep businesses going while waiting for customers to pay for outstanding invoices. 

For instance, some factors will cover 100 percent of the total invoice value, and then charge you fees when you repay them. This way, you don't have to wait for customers to pay their invoices to get all of the money you need, and the factor isn't deducting fees from customers' payments or money you do not have. 

Some factors also don't require a notice of assignment, so your customers never have to know you're using a factoring company. These factors allow you to continue receiving payments from customers as if nothing has changed, and then you forward the funds as repayments to the company, plus fees.

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Factoring