Factoring 101: Frequently Asked Questions


Before you use a factoring company, there are a few factoring faqs that you should be aware of. First, understand that non-recourse factoring is more risky for the factoring company. In contrast, resource factoring is much less risky for the factor. Second, each factor has a different contract term and requirement. Some require a six-month or 12-month contract, while others don’t require a contract at all.

Factoring is a cash-flow solution

Factoring is a short-term source of funding that offers companies immediate access to cash. Businesses with high volumes of accounts receivable, but limited access to bank financing, can benefit from factoring. This cash-flow solution helps businesses operate more efficiently by providing them with cash on hand the same day they receive it. It also enables businesses to take advantage of fuel discounts.

A good factoring company will also perform a credit check on new customers. This can help to reduce the amount of bad debt a business will accrue. By doing so, businesses can avoid the negative aspects of collections, including unwanted litigation.

It improves cash flow

Factoring is a way to increase your business’s cash flow and help you stay current on payments. This service works by pre-paying your invoices in advance. In many cases, factoring companies will pay up to 85% of the face value of your invoices. The remaining 15% will be passed on to you once you receive payment from your customer. In exchange, you pay factoring fees, which are deducted from the amount you invoice.

Debt factoring improves cash flow by giving your business immediate access to revenue that is due to it. It eliminates the need to wait weeks or months for a customer to pay. This delay can severely hinder your business’s cash flow and limit your capacity to pay staff, settle operating expenses, and purchase new stock. By removing this delay from your business’s cash flow, you can spend more time growing your business.

It doesn’t affect credit ratings

Factoring is a great alternative to bank financing for your business. Unlike a bank loan, factoring doesn’t affect your credit rating, and can help you build a stronger credit history. Essentially, factoring works by releasing cash tied up in open invoices. It gives your business a cash infusion days after the invoice is issued. This helps you improve your credit rating in three ways:

One way factoring can help you build a better credit score is to improve your payment history. Your customers will be more likely to trust you if you have a high credit score. Invoice factoring can also help you improve your business’s credit score, so that you can qualify for more credit terms and fulfill large orders. Your business’s credit score is an important indicator of your credibility, and any potential customer will check it before deciding to do business with you.

It’s a traditional loan

Factoring is a debt-free way to access quick cash. Unlike bank loans, which can take weeks to process, factoring is approved in as little as one day. The approval process depends on the creditworthiness of your customers. As a result, factoring is a great option for small business owners with bad credit.

Factoring works by providing advance on sales. As such, it doesn’t require repayment and allows you greater flexibility when it comes to adjusting your sales. Unlike a loan, factoring doesn’t appear on a company’s balance sheet, so it doesn’t affect your credit report.