Basics

If you have a steady client base that pays their bills more slowly than you would like, factoring can provide working capital based on your floating accounts receivable. It's particularly useful for startups or companies without much collateral for securing a traditional loan.

How it works

To work with a factor, you start by handing over copies of the accounts receivable that you want funded. Depending on your business and the terms of your agreement, the factor will advance you 70% to 90% of the total invoice value, usually by directly wiring it to your bank account. You can typically get an advance against your invoices within two to five days. If the factor accepts electronic invoices, you may get funded within 24 hours.

Before accepting the invoices, the factoring company will research your clients to make sure they are creditworthy and pay their invoices on time. The factor then takes the original invoices, looks them over for missing signatures or incorrect dates and makes the changes if there are discrepancies, and requests payment from the client. Once they validate the invoices, the factor will send a "notice of assignment" to your customers. The notice explains that all payments related to the outstanding invoices must now go directly to the factoring company.

After receiving payment from your customers, the factor wires you the remaining balance of the invoice, minus an agreed-upon factoring fee (or "discount rate") ranging from 1% to 5%. If you need a larger percentage of the total in advance, a factor may provide up to 90% of the invoice value upfront in exchange for a higher discount rate.

Most factors provide online invoicing systems that let you monitor the whole process in real time, from invoice submission to payment.