Factoring FAQs and Key Questions to Ask Before Signing a Contract

Need for small business funding that’s accessible and pays out fast? Invoice factoring may be the solution you’re looking for, but it works differently from other forms of funding. In this small business factoring guide, we’ll walk you through some general factoring FAQs and then review questions to ask individual companies to ensure they’re a good fit and create a tailored agreement.

General Factoring FAQs

Every factoring company operates a little differently. We’ll start with some general invoice factoring questions to help you get a better feeling for the service and how it works.

What is an invoice factoring company?

An invoice factoring company, sometimes called a factoring company or factor, is a third party that purchases unpaid invoices from a business. While some banks offer this service, it’s typically provided as a stand-alone service or by companies that specialize in alternative lending.

How does factoring work?

The process of factoring can sometimes be referred to as accounts receivable factoring or A/R factoring. Businesses use it to accelerate their cash flow. Instead of waiting weeks or months for your customer to pay, you simply submit your invoice to the factor, and they pay most of the balance right away. A typical process is outlined below.

• Order: Your customer places an order with your business, like they usually do.
• Credit Check: If you know you’ll want to factor the resulting invoice, you’ll touch base with the factor, which will then verify the creditworthiness of your customer and approve the account for factoring.
• Invoice Submission: You complete a sale or deliver a service, then send your customer an invoice as usual. Instead of waiting for payment, you also send that invoice to the factoring company.
• Advance Payment: The factoring company verifies the invoice and advances you a percentage of the total. This is usually between 80 and 90 percent of the invoice’s value, though sometimes it can be in the neighborhood of 60 percent or even up to 100 percent, depending on the factoring company you work with and the level of risk the invoice presents.
• Customer Payment: You’re free to focus on your business. The factor follows up as needed, and your customer pays the factoring company directly, following the instructions in a document called a Notice of Assignment, which tells them where to send payment.
• Reserve Release: Once payment is received, the factoring company releases the reserve balance to you, subtracting its agreed-upon fee.

How is invoice factoring different from invoice financing?

As discussed earlier, factoring involves selling your invoices to a third party that advances payment and collects from your customers. On the other hand, invoice financing is a loan that uses those invoices as collateral. You still collect from your customers and repay the lender with interest.

How is factoring different from traditional financing?

Whereas factoring provides funding based on the strength of your customers’ credit rather than your own, qualifying for traditional financing, such as bank loans or lines of credit, depends on your business credit score, financial history, and collateral. Factoring is also faster and more flexible.

How quickly can I get funding through factoring?

If you’re just getting started, it can take a couple of days to a week before you’re funded. This is largely dependent on the factoring company you partner with and how prepared you are. The best factoring companies can have you approved within a day or two, provided you have common business documents handy and submit them in a timely manner.

Once your business and your customer are approved, then it’s just a matter of verifying individual invoices as they come through. Some factors can verify the invoices right away, while others take a couple of days.

Most factors make automated clearing house (ACH) payments. This means payments hit your account within about 24 to 48 hours, depending on your bank. Some offer expedited wire service, which allows you to get same-day funding. You can also often choose payment by check, though most businesses opt for digital payments because they’re faster.

Can startups and small businesses qualify for factoring?

Yes, factoring works for young and small businesses. You can even get approved for factoring if you’ve been denied a bank loan. Approval for factoring is tied to the payment history of your clients and not contingent on your creditworthiness, so most businesses qualify.

Will factoring affect my business credit?

Factoring typically does not impact your business credit because it is not a loan. You are selling an asset rather than taking on debt. Since there are no repayment terms or interest charges, factoring does not appear on your balance sheet as a liability.

With that said, factoring can potentially help strengthen your credit profile indirectly. By improving cash flow, you can pay suppliers, lenders, and other obligations on time, which supports a stronger payment history.

How do factoring fees work?

Factoring fees are the cost you pay for early access to your unpaid invoices. Most factoring companies charge a small percentage of each invoice’s value, often referred to as a discount rate. This is typically between one and five percent of the invoice’s value.

The exact amount depends on factors such as the size of your invoices, how long your customers take to pay, and the risk involved. Rates are usually structured as a flat fee or a tiered fee that increases the longer an invoice remains unpaid.

Some factors also charge small administrative or wire fees, but these should always be disclosed upfront so you know the total cost before agreeing to any terms.

How do factoring fee structures compare to credit or loans?

Factoring fees are structured differently from traditional interest rates. When you take out a loan or line of credit, interest accrues over time until the balance is repaid. With factoring, the cost is tied to how long your customer takes to pay the invoice.

That means if your customers pay quickly, your total cost is lower. There are no compounding interest charges or late payment penalties for you, since you are not borrowing money. Instead, you’re paying a one-time fee to receive most of your invoice value upfront.

How are payments and collections handled after factoring?

Once you factor an invoice, your customer pays the factoring company directly. This process is explained to your customer through a Notice of Assignment, which simply redirects where payments are sent.

The factoring company manages payment tracking and collections professionally, acting as an extension of your business. Reputable factors communicate with customers respectfully and only as needed to confirm payment status.

You still have full visibility into your accounts, but you no longer have to spend time following up on outstanding invoices or managing collections.

What types of businesses benefit most from factoring?

Factoring is most helpful for businesses that sell to other businesses or government agencies and issue invoices with payment terms. It’s especially valuable in industries where long payment cycles strain cash flow. A few industries that commonly use factoring include:

• Trucking and Transportation Companies: By leveraging transportation factoring, businesses can keep fuel, maintenance, and payroll covered while waiting for brokers or shippers to pay.
• Manufacturers and Wholesalers: By using manufacturing factoring, companies can manage supply costs and large purchase orders without relying on loans.
• Construction and Contracting Firms: Subcontractors don’t typically qualify for funding, so Construction Quick Pay programs from factoring companies empower general contractors to accelerate their payments without covering anything out of pocket.
• Staffing Agencies: It’s common for firms to have a weekly payroll even when clients pay monthly. With staffing factoring, the gap is closed.
• Service Providers and Consultants: Specialized factoring for service providers allows you to handle recurring expenses while clients pay on extended terms.
• Oilfield: Leading energy companies often pay on net-90 terms, which is far too long for smaller subcontractors to wait. By leveraging oilfield factoring, capital for equipment, materials, and labor becomes available instantly.
• Healthcare: Large payors can make payments drag for medical providers. This impacts everyone downstream, from equipment manufacturers to supply companies and medical staffing agencies. Companies that provide healthcare factoring often help everyone in this chain, so cash keeps flowing, businesses grow stronger, and patients get the care they need.

What’s the difference between recourse vs. non-recourse factoring?

The main difference is who takes responsibility if a customer does not pay the invoice.

• Recourse Factoring: In recourse factoring, your business agrees to buy back or replace any invoice your customer fails to pay. Because you assume the risk, recourse factoring usually has lower fees.
• Non-Recourse Factoring: In non-recourse factoring, the factoring company assumes most of the risk of nonpayment. This protection typically applies only if the customer cannot pay due to insolvency, but not if they simply dispute the invoice or delay payment. Because the factor absorbs the risk, it tends to come with slightly higher costs.

How will factoring affect my customer relationships?

Factoring can strengthen your customer relationships by allowing you to deliver more consistent service and accept larger orders, since cash flow is no longer a barrier. It can also allow you to extend more relaxed payment terms, which customers appreciate.

While some businesses have concerns about their customers having negative experiences with the factoring company during the collections process, this is not generally the case. Factors are not debt collectors, meaning their approach is much like an outsourced collections department and focused on customer service to ensure repeat business, as opposed to debt collectors that work with overdue accounts and can sometimes use pushy tactics to get at least a portion of the balance paid.

When issues arise, such as an invoice dispute or non-payment, those accounts are usually returned to your business, so you can resolve the issue with your customer directly. This also helps keep the factoring-customer relationship friction-free.

What should I keep in mind when choosing a factoring company?

There are many things to keep in mind when selecting a factoring company. A few core areas are outlined below.

• Industry Experience and Specialization: As touched on earlier, it’s better to work with someone who specializes in your industry. The more experience they have, the better your experience will likely be.
• Transparency in Contracts and Pricing: Listen to what your factoring specialist says about any terms and fees, then compare it to what you see in writing. If you see things that were glossed over or not mentioned in the contract, it’s a red flag.
• Total Costs: Whenever possible, ask for a monthly breakdown of total costs for a business like yours. This will help you catch any incidental charges.
• Support, Technology, and Reporting Tools: Find out who you can talk to if you face an issue, how the process is managed, and what tools you’ll have access to, as these directly impact the quality of service and the speed of funding.

What are the legal and operational implications of factoring?

As with any financial or business agreement, there are legal and operational implications of factoring. Three main areas of concern are Universal Commercial Code (UCC) filings, coordination of cash flow processes, and termination of your factoring agreement.

• UCC Filings: When you’re factoring an invoice, you’re transferring ownership of it to the factoring company. To protect their interest in your invoices and ensure no other creditor can claim them, your factoring company will likely make a UCC filing. This does not impact your credit or other borrowing options aside from not being able to use your invoices as collateral elsewhere. The factor is responsible for filing a release when your agreement ends. 
• Accounting and Cash Flow Coordination: To maximize the benefits of factoring, most businesses submit their invoices as soon as work or goods are delivered to the customer. You’ll need to ensure these invoices receive a special designation in your accounting software to prevent sending them balance notifications for any invoice that’s being factored.
• Exit Clauses: Most factoring contracts specify what happens when you leave the company. Oftentimes, there’s a requirement to provide 30 to 90 days’ notice to allow time for your open invoices to be paid and wrap-up activities to be managed. However, some factoring companies also require long-term agreements that require you to stay with them for an extended period of time, such as 12 months. You’ll also want to be on the lookout for fees associated with exiting your contract and auto-renewal clauses.

Do only distressed businesses use factoring?

Not at all. Businesses with healthy profits use factoring to accelerate payment all the time. Sometimes they do it because it allows them to take on larger orders or accept new clients. Others use it to navigate seasonality with greater ease. Many businesses experiencing rapid growth leverage it, too. It can help you keep up with the increased expenses while you wait for receivables to catch up.

While more established businesses can use bank loans or lines of credit for this, factoring’s easy qualification process and fast payment timelines often make it more ideal.

What to Ask a Factoring Company Before Signing a Contract

Now that we’ve covered the basics, let’s dig into factoring agreement terms and the things that set factoring companies apart. You can use this as a business factoring checklist as you make a decision on which factoring company to go with.

Do you specialize in my industry?

As mentioned earlier, factoring companies may specialize in different industries. It’s better to go with a factor that understands your industry because you’ll often qualify for better terms, unique perks, and special programs.

For instance, Viva Capital has factored over $2 billion in invoices for the transportation industry. It’s how we got our start. Today, we offer some of the lowest trucking factoring rates, starting at 0.75 percent, and the highest advance rates, reaching up to 100 percent, minus the factoring fee. Our trucking clients can also use our fuel cards to improve cost control and save at the pump at over 1,000 locations.

What will my advance rate be?                

Knowing your advance rate is essential because it helps you plan out your cash flow better. Again, advances are usually around 80 to 90 percent of the invoice’s value, though some can be higher or lower. At Viva we can advance up to 100 percent of the invoice value, minus the factoring fee, in some cases.

Depending on your factoring company, you may be able to negotiate your advance to some degree. For instance, if you’re willing to pay a higher fee or your customers are especially good payers, factors may be more willing to increase your advance.

What will my discount rate be?

Because your discount rate accounts for most of your expenses with factoring, understanding it and how it is charged is essential. As mentioned earlier, factoring rates are typically between one and five percent of the invoice value. At Viva, we offer rates as low as 0.25 percent.

What charges could I incur beyond the factoring fee?

This question is essential because each factor may charge for different things. Some of these fees may include:

• Application: This is sometimes charged when you apply for factoring, though it’s not common.
• Account Setup: Occasionally, factors will assess a fee to cover the costs of setting up your account with them.
• Credit and Due Diligence: As mentioned earlier, factoring companies check into the creditworthiness of your customers prior to accepting an invoice for factoring. Some charge a fee for this each time, while others fold it into their operating costs.
• Funding and Transfer: Some factors charge a fee when you request an advance or a fee based on the method of payment you select. This is more common when you request same-day payment, as the factor incurs a fee for wiring the funds, and it’s usually passed on to your business.
• Late Payment: A late payment fee may be assessed if your customer doesn’t pay on time.
• Minimum Volume: Depending on the factor and your specific agreement, you may be expected to factor a certain dollar amount each month. Failing to meet your minimum can result in fees.
• Early Termination: If your factoring contract stipulates you must stay with the company for a set period of time, there’s often a penalty for ending the contract early.

When can I expect my advance?

Most businesses leverage factoring because it pays out fast. Find out what their timeline is and if they offer any guarantees around it or if they’ve ever missed a promised deadline.

When will my factoring reserve be released?

Factoring reserves are typically sent within a day or two of your customer making the payment. However, some factors will hold it for ten days or will make batch payments on these. Understanding this timeline is critical to planning your cash flow.

Can I choose which invoices to factor?

Again, some factoring agreements require you to factor all invoices or all invoices from a specific customer. Others let you factor only as needed, like Viva Capital does.

Am I required to meet minimums?

We touched on the idea of factoring minimums already, but they’re worth covering on their own. Minimums are not inherently bad. In fact, if you can meet certain volume requirements, many factoring companies will reduce your factoring rate. Regardless of which side you sit on, though, it’s essential to know what’s expected.

Will I be tied into a long-term contract?

Like minimums, the long-term agreements aren’t necessarily bad. Agreeing to stick with a factoring company for an extended period can sometimes result in lower fees, too. However, if you want the flexibility to leave on your timeline, be sure they’ll allow it and that it’s written into your contract.

What happens if I decide to leave or don’t need factoring anymore?

Realistically, all businesses will end their factoring agreement at some point. You might decide to leave because you no longer need infusions of cash from the outside, you qualify for other forms of funding that make more sense for your business, or you simply want to switch to another factoring company. Because of this, it’s essential to get clear on what happens when you leave your factoring company, long before you ever consider leaving them.

Some companies, like Viva, make the process as seamless as possible. We can help you gradually move away from factoring if it’s what you want, can provide you with alternate forms of funding, such as equipment loans, or even coordinate with a new factoring company if you decide to leave. However, we focus on service to ensure you never want to.

What will my customers experience while I’m factoring?

This is a key question for businesses concerned about their customer relationships. You want to know how the Notice of Assignment is handled and what the collections process is like.

What happens if a customer doesn’t pay on time?

Half of all B2B payments arrive late in the U.S., according to Atradius. Factoring can help reduce this with credit checks and provide you with insights into the payment habits of your customers. However, there’s always some risk.

We touched on recourse vs. non-recourse factoring earlier, and how there are many situations in which your business will ultimately be held responsible for ensuring the factoring company does not face a loss when your customer doesn’t pay. However, it’s important to note that factoring companies may offer different methods for addressing this.

The most common method is to have your business submit a new invoice of equal value to replace the unpaid one. Sometimes, factoring companies will dip into reserves if they are adequate to cover an unpaid balance. These tend to be the preferred methods because they mean your business isn’t losing any money out of pocket and allow you to keep moving forward. However, some agreements will also stipulate that you must buy back the invoice if certain conditions are met. Make sure you know what the process is.

Who do I contact if I have a question or problem?

You’ll meet a few people at a factoring company when you’re getting started. At first, you’ll likely connect with a sales executive, and then someone on the underwriting team as your account gets approved. But as you move into the day-to-day management of your account, when you have questions about adding new customers, what’s happening with an invoice, and other services offered by the factoring company, it will be a third department or person. A good factoring company will ensure this handoff is managed professionally, but it’s always wise to confirm who you’ll be connecting with later.

How do I submit and manage invoices?

Tech-friendly factoring companies like Viva Capital will provide you with access to a portal and your own personalized log-in details to submit, manage, and track invoices. This can be accessed 24/7. However, not all factoring companies offer this, so it’s essential to find out what the process is and work through whether their systems can be easily coordinated with yours.

Get Tailored Answers to All Your Factoring FAQs

While this guide should be enough to build your familiarity with factoring and can help guide your discussions with factors, the best way to understand what your terms will be and what to expect is to speak with a factoring specialist. To kickstart the process, request a free factoring quote.