Factoring Accounts Receivable - Everything you Need to Know
Are you thinking about factoring your accounts receivable but have questions? Our comprehensive FAQs should get you started on your journey to better business cash flow, whether you've never used factoring before or you simply need a bit of a refresher...
General
Invoice factoring unlocks the liquidity in a business’ outstanding accounts receivable. Rather than waiting for an extended period of time to get paid by clients, businesses can sell their unpaid invoices to a factoring company who pays them for those invoices minus a small fee. This provides immediate working capital for the company, giving them the funds to meet obligations or invest into business growth.
There are many other benefits to factoring; high finance limits based on revenue, scalability of the facility to grow as the business grows, less stringent qualification requirements than traditional finance, less stress as you don’t need to wait for payments from clients and a number of expert value-add services that the client can take advantage of from the factoring company.
The two main types of factoring are recourse and non-recourse factoring. Some factoring companies will offer both, some will only offer recourse factoring as standard.
With recourse factoring, you are responsible for repayment of the debt in the event that your customer doesn’t pay their invoice. In non-recourse factoring, the factoring company assumes the loss of non-payment.
No. Unlike a traditional loan, invoice financing is not a type of debt finance and as such it doesn’t need to be recorded on the balance sheet.
Not generally no. Unless they have a factoring subsidiary or they partner with a factoring company to provide those services.
No difference. The terms are used interchangeably but invoice factoring is the most widely used form of accounts receivable finance. Other types of accounts receivable finance include asset-based lending which is a loan secured against the company’s receivables.
Cost
Usually, factoring companies will charge a fixed fee or a percentage for each factored invoice. Some companies will have other ad-hoc fees depending on the client and situation.
Per invoice factoring fees typically range between 2-5% per invoice but this will depend on the creditworthiness of the client’s customers, the volume of invoices factored and more. As a rule of thumb, the more invoices you factor and the better your customer’s credit is, the lower your fees will be.
There are many other benefits to factoring; high finance limits based on revenue, scalability of the facility to grow as the business grows, less stringent qualification requirements than traditional finance, less stress as you don’t need to wait for payments from clients and a number of expert value-add services that the client can take advantage of from the factoring company.
Eligibility
Any business of any age who is selling products or services to another business can use invoice factoring services. We serve clients across wide-ranging industries from professional services and renewable energy to staffing, manufacturing and the food and beverage sector.
There are many other benefits to factoring; high finance limits based on revenue, scalability of the facility to grow as the business grows, less stringent qualification requirements than traditional finance, less stress as you don’t need to wait for payments from clients and a number of expert value-add services that the client can take advantage of from the factoring company.
If you have invoices billed to other businesses and creditworthy customers, you’ll likely be a good candidate for invoice factoring.
Yes! We are focused on the creditworthiness of your clients first. We understand that many businesses go through rough patches but what matters to us is where you’re heading and what your prospects are.
Generally yes. We consider businesses with outstanding taxes so long as their payments to the CRA or IRS are in good standing with a payment arrangement in place.
Yes. Sallyport has decades of experience in supporting cash strained businesses through restructures using specialized finance solutions; typically this happens during Chapter 11 corporate bankruptcy law.
No. We provide factoring services to businesses located throughout North America and even for those businesses that are foreign-owned subsidiaries.
No. We support many businesses with clients across states.
Yes, a young company or startup is an ideal candidate for invoice factoring as they often can’t meet the ‘time-in-business’ and credit score requirements of a traditional lender.
Invoice factoring can be utilized at any stage of business but there are certain scenarios when factoring is the best option. New businesses, businesses that have seasonal or cyclical sales cycles, rapid growth companies and any business offering extended payment terms can benefit from factoring as a way to achieve more consistent cash flow. Factoring is also crucial for those businesses that can’t get bank finance for one reason or another.
Monthly minimum requirements are based on the clients’ revenue. It could range anywhere between $10,000 - $2 million each month typically.
Any invoice that is less than 90 days old, issued to any business customer can be factored in theory.
We require all invoices to be submitted to us for management purposes, however, clients are free to choose which invoices they want advances on.
In most cases, we can allow invoices to be factored up to 90 days old.
Application Process
Of course it varies depending on the complexity of the business situation but we aim to get clients funded in a matter of days.
We usually suggest a short term of 12 months but we will consider 6-month terms if needed.
For the application process we will usually need you to provide a few key financial documents and pieces of identification to prove identities of the company shareholders. If there’s something you can’t provide, we will always try and work with you to find a resolution.
Payments
The advance rate is the percentage rate of the invoice that the factoring company will advance to you when factoring an invoice. For example, if you were factoring a $10,000 invoice at a 90% advance rate, the factoring company would pay you $9,000 for that invoice.
Most factoring companies will make payments to their clients by bank transfer.
The factoring company retains a percentage of the invoice in reserve until your client pays the invoice. If there’s a 90% advance rate, 10% of the invoice value is held in reserve. Once the invoice is paid in full, the factoring company sends the rest of the money to you, minus their fee.
A factoring company will send a Notice of Assignment (NOA) to your customers, letting them know that they now own your accounts receivable and giving instructions as to how payment should be made.
A notice of assignment is a letter that factoring companies use to notify your clients (debtors) that your invoices have been assigned to them and to make payments according to the instructions they’re providing.
Your Customers
In most cases yes. Although some factoring companies offer two options; notification and non-notification factoring, it’s more common to factor on a notification basis.
On a notification basis, your customer’s will remit their payment directly to the factoring company. On a non-notification basis, the client handles the collection of their own invoices and remits payment to the factor.
Most of your customers will be familiar with factoring to some extent and understand that it’s a great way to improve cash flow and financial health without adding debts. You can explain to them that a factoring company will be managing your receivables to free-up your internal resources but that they will continue to contact you for all other day-to-day business. Of course, we can support you in the transition process in any way you need.
Other Questions
There’s no inherent risk from invoice factoring. Whenever you take on a new client, there’s a risk that they might not pay your invoices; however that risk is present whether you factor your invoices or not.
Factoring companies having contact with your clients can be perceived as a negative sometimes. A good factoring company will treat your customers as their own and become an extension of your own team. At Sallyport we work closely with our clients to ensure that your hard-earned relationships are maintained and this shows in the number of referrals we receive through our professional account management team.
No it doesn’t hurt your credit score because you’re not incurring a debt unlike a traditional bank loan. Factoring could in fact help you to build or rebuild your credit score as it provides a steady source of cash flow.
There are hundreds of financing options available to business owners now but not all of them are easy and quick to qualify for. If you’re looking for non-debt, non-dilutive finance that grows with your business, factoring really is a unique financial solution compared to others.
Apply Now or Request More Information
Have more questions? Reach out to one of our funding specialists who will be more than happy to answer any further questions and get the process started. Alternatively, apply now and get cash for your receivables in days.