What it is
With factoring, you sell unpaid invoices to a factor, which advances 70–90% of their value, collects from your customer, then pays you the rest minus its fee. With invoice financing, you borrow against the invoices and keep collecting yourself. Only businesses that invoice other businesses can use either.
What it really costs per year
Fees usually run 1–5% for each 30 days an invoice is outstanding, plus setup and transfer fees. Per year, that's about 12% at 1% and 36% at 3% of the invoice, and more measured against the cash you actually receive (a 3% fee on an 85% advance is about 43% a year). A slow-paying customer raises the cost.
Work out the yearly cost of an offer you have
How fast the money comes
Setting up an account takes days to a couple of weeks; after that, invoices are usually funded in one to three days.
Who qualifies
- Mostly your customers' credit, not yours, so young businesses with creditworthy customers can qualify.
- Documented invoices to other businesses, and usually no other lender with a lien on your receivables.
Where it breaks
- With recourse factoring, you buy back invoices your customer doesn't pay, usually after 30 to 120 days. Non-recourse costs more and usually covers only a customer going under, not disputes.
- Factors usually contact your customers to collect, which some customers notice.
- Monthly minimums, tiered fees and long contracts raise the real cost.
Compare with
- Bank loans and lines of credit: yearly cost about 7–11%, money in 2–8 weeks.
- Business credit cards and 0% offers: yearly cost about 13–29%, money in days to 2 weeks.
- Merchant cash advances (MCAs) and processor capital: yearly cost about 23% to over 130%, money in 1–3 days.