Invoice factoring companies have different eligibility conditions, advance rates and factoring costs than their competitors. In addition, some factoring companies offer non-recourse agreements, while others exclusively offer recourse factoring. Consider these factors when choosing an invoice factoring company:

Financing conditions

Invoice factoring is easier to qualify than traditional forms of financing, but there are still certain requirements that companies must meet. And, because the factoring company assumes the risk of non-payment, the factoring companies are also concerned about the creditworthiness of the company’s customers.

Here are some common qualifications imposed by factoring companies:

• The company is incorporated in the United States
• The company sells to businesses, not directly to consumers
• Monthly sales are at least $ 5,000
• The company has limited or no access to traditional financing
• Customers are creditworthy
• Customers have 30 days or more to pay their bills, but no more than 90 days

To qualify for invoice factoring and meet the above requirements, factoring companies often require businesses to submit personal and professional income tax returns for the past three years, with financial statements dating back three to three years. five years and accounts receivable and accounts receivable seniority reports.

Advance rate

The advance rate is the percentage of unpaid invoices that the factoring company pays in advance to the business. The percentage typically ranges from 70% to 95%, but hovers around 80% for most companies. Factors such as the stability of the business, as well as the company’s industry and transaction history usually determine potential cash advance rates.

For example, a business in the construction industry is considered to be riskier than more traditional businesses, so the upfront rate may be closer to 60%. In contrast, companies in the transport sector are considered the least risky and advance rates can reach 97%.

Factor fees

Factoring fees, sometimes referred to as discount or factoring rates, are fees charged by businesses over time and until an invoice is paid in full. These fees generally vary from 0.50% to 5% and can be fixed or variable. In the case of fixed factor rates, the rate remains the same until the invoices are reimbursed. With a fixed rate of 3%, the business is billed a rate of 3% of the total invoice amount when the invoice is paid, regardless of the period during which the invoice is paid.

With variable factor charges, the rates increase with the time it takes the customer to pay the bill. For example, the factor rate may start at 1%, increase to 2% in the second week, and up to 5% in the third week. Alternatively, the rate can start at 2% and stay there for the first 30 days, increasing in defined increments thereafter.

Recourse or non-recourse agreements

Factoring agreements can be recourse or non-recourse, which dictates what happens if an invoice is not paid. If a company signs a recourse factoring agreement and the invoice is not paid, the company must redeem the invoice or exchange it for another invoice of equal value. Recourse agreements reduce the risk posed to invoice factoring companies and are more common, especially in high-risk industries like construction.

Under a non-recourse agreement, the factoring company assumes the risk of non-payment and the company is not obligated to redeem invoices, even those that remain unpaid. For this reason, non-recourse factoring agreements are generally more expensive and are reserved for industries that pose less risk to factoring companies.