Invoice Factoring

When a business needs cash but doesn’t want to borrow money they often turn to Invoice Factoring. Rather than a bank loan, the business sells the right to receive payment on outstanding invoices to an investor or factoring company.

How the Factoring Business Works

When the business delivers goods or services to a customer an invoice is created. The average customer or debtor may wait 20, 30, or even more days, before paying the invoice. Rather than wait for payment, the business can receive an immediate advance on the face amount of the invoice from the factoring company.

The factoring company issues the advance to the business and keeps back a portion in reserve. When the invoice is paid the reserve is released to the business, less the factoring fee. There is no interest or loan fee charged as the process involves the assignment of an invoice rather than the creation of debt.

Here is an example of accounts receivable factoring:

  • Invoice Amount Customer owes Business $10,000
  • Advance Rate Paid to Business (Assumes 80%) $8000
  • Reserve Held By Factor (Assumes 20%) $2000

Invoice paid in 30 days

  • Fee Deducted from Reserve (Assumes 2.5%) <$250>
  • Balance of Reserve Paid to Business $1750
  • Total Amount Received by Business $9750

The amount of the advance, reserve, and factoring fee can vary by industry, customer strength, and how long it takes the customer to pay the invoice.

Some factoring companies might also charge a small one-time set up fee to the business upon acceptance (averaging $350). While the assumptions may vary from the example, they will be clearly spelled out upfront in the proposal and agreement between the business and factoring company.

So, how do you make money in the factoring business?

Factoring Company or Investor  –  You may choose to be the funder or Factor on the deal and make the factoring fee (2.5% in the example above). Keep in mind that is only one month and only one invoice. Of course the numbers get bigger as the invoices increase in size. You also decide what your “fee” will be. You may charge 2.5% as the example shows, or you may charge more.

For great training on funding deals yourself, check out the Small Business Factoring Series – 6 Essential eBooks for Factors and Consultants by Jeff Callender. The whole package is only $95 and a great way to get started in the factoring business!

Factoring Broker or Consultant –  If you don’t have your own money to invest, or simply want someone else to take the risk, you can broker the transaction. Consultants who broker the deals typically get 10% of whatever the Factor makes. Again, this is every invoice, every month. So you can see how it can become significant income in a real hurry!

Looking for more information on starting a factoring business?  Check out our site dedicated to factoring invoices at FactoringInvestor.com!