What Is a Factoring Company and How Do They Help Businesses?

What Is a Factoring Company and How Do They Help Businesses?

A factoring company, also called a factor, is a financial services business that buys invoices from other businesses in exchange for immediate cash. They then collect payment from the original business's customers.

What Does a Factoring Company Do?

When a business needs cash from its outstanding invoices before customers pay, a factoring company provides that cash upfront. In exchange, the factoring company:

• Advances a percentage of the invoice value (typically 70-90%) immediately
• Takes ownership of the invoice
• Collects payment from the business's customer directly
• Releases the remaining balance (minus fees) once collected

The factoring company makes money through the fees charged on each invoice, typically a combination of a service fee and a discount fee (interest on the advance period).

Types of Factoring Companies

Full-service factors: Manage the entire collections process, handle debtor credit checking, and may offer credit insurance. Suited to businesses that want to fully outsource their accounts receivable management.

Disclosed factors: Your customers know their invoices have been sold to the factor and are directed to pay the factor. The most common arrangement.

Confidential factors: Collections are managed in the business's name, so customers are less aware of the arrangement. Less common in traditional factoring.

What to Watch Out For With Factoring Companies

Before engaging a factoring company, understand:

• Whole-ledger requirements: Many require all invoices to be assigned, not just selected ones
• Contract terms: Minimum contract periods and exit fees can be significant
• Customer notification: Your customers will typically be directed to pay the factor directly
• Recourse obligations: If a customer does not pay, you may be required to buy back the invoice
• Total cost: Service fees, discount rates, and additional charges can add up, get a clear total cost illustration

The Modern Alternative

The traditional factoring model has been significantly improved by fintech solutions. FundTap offers the core benefit, immediate cash from outstanding invoices, without the whole-ledger commitment, customer notification, or long-term contracts that characterise traditional factoring.

For businesses that want to access invoice funds quickly without the restrictions of traditional factoring arrangements, selective invoice finance is worth exploring before committing to a factoring contract.

Frequently Asked Questions