Want more information on this funding option? We answer the most common invoice factoring FAQs below.
Have you considered using invoice factoring to increase capital for your business but you’re not quite sure how it works?
Below, we’ve answered the invoice factoring FAQs about this popular funding option, so you can assess if factoring is right for your business. Many of these questions are actually directed towards the factoring company itself, as it’s an important part of assessing your partnership. When learning about invoice factoring, your partner should be able to answer all of these questions to your satisfaction.
Invoice factoring FAQs: Top 11 questions that businesses ask invoice factoring providers:
Q1) What is invoice factoring? (If you already know, skip to Q2!)
Invoice factoring essentially means selling your open invoices to a factoring company, called a « factor. » It allows businesses to generate immediate cash flow and access capital that would otherwise be held up by slow-paying customers.
In B2B, it’s common to offer 30, 60 and 90-day payment terms, however, this means you have to wait for payment. Instead, companies sell the invoices to a factoring partner at a slight discount, and can immediately inject that capital into their business. You get paid most of the invoice upfront, while your factoring partner holds back a “reserve” as they wait to collect the full payment from the end client. Meanwhile, you can move forward with your business.
One main advantage of selling invoices to a factoring company such as Liquid Capital is that you’re not adding any further debt to your books. You’re simply leveraging your assets to inject money into your business.
Q2) How long have you been in business?
Before placing your trust in any factoring company or lender, it’s important to know if the company has substantial experience working with businesses like yours. It’s also critical to work with a factoring company that understands your industry and has credibility with its clients.
Here at Liquid Capital, we’ve been in business since 1999 and we’ve deployed over $3 Billion in working capital across North America. We have more offices across North America than any other trade finance company, and we’re always happy to work with our clients to give them a clear picture of their business funding options.
Read our Liquid Capital success stories to see how we help businesses.
Q3) What are your terms and cancellation policies?
A reputable factoring company will never lock you in a lengthy contract. When selecting a lender, ensure they offer you flexible terms and conditions and that there are no auto-renewals in place. They should also offer a 30-day cancellation policy, so if you are no longer in need of funding, you are free to end your contract with them.
The best agreements are those that are structured like those at a bank. Look for factoring companies that offer agreements without clauses that lock you in.
Learn more on how invoice factoring works here.
Q4) How much are the charges?
Understanding the fee structure is crucial, especially because many factoring providers entice customers with lower upfront costs. You need to be on the lookout for hidden fees and add-ons that can really rack up your borrowing costs. It becomes especially important to take the time and review everything before you sign on the dotted line.
A good factoring partner will give you a clear outline of the fees so there are no surprises and you are in a better financial position as a result. At Liquid Capital, we’ll discuss these details with you, walk through the numbers, and ensure you have confidence that this solution will work for your business.
Q5) How are the reserves calculated?
For example, let’s say you are selling a $10,000 invoice, and the factoring company holds a reserve of $1,000. Once the end customer pays the invoice in full, the factoring company will forward you the reserve fund of $1,000 minus their fees.
Q6) Do you outsource your operations?
Some factoring companies outsource payment collections to third-party vendors. These arbitrators may not give customer service the same level of attention and importance as you would when dealing with your clients.
Because these vendors are more concerned about getting paid, they may be less dedicated to the customer experience during payment recovery.
Q7) When will a security be registered against my business?
A security is a form of asset that a lender uses to secure a loan. For businesses wanting to gain funding through invoice factoring, the most common form of security is accounts receivables or invoices.
When you fill out an initial application form with an invoice company, they may register a security against your business. Some may do this even if you don’t do business with them, which should be avoided if possible. .
It is important to understand that if you submit multiple applications to different factoring providers, there could be security registrations filed on your business that you are not aware of. This could potentially create a negative situation where other lenders may not be able to get the proper interest against your assets and may shy away from providing funding that you need.
Q8) Is there a ‘consent judgment’ in the legal documents?
This question is applicable only to companies in the United States. Some lenders that have predatory practices ask for a consent judgment in their legal documents. Upon signing, you’re giving consent that in case of disputes, future judgments be ruled in favor of the factor.
Q9) What jurisdiction is your choice of law?
If you happen to get into a dispute with a lending partner, choice of law dictates what jurisdiction your case will be defended in.
You might want to work with a company that has a choice of law closer to where your business is located, so you both have a fair chance in any dispute. You don’t want to travel all the way to Panama to defend yourself, if the other party chooses that jurisdiction.
Q10) Is there a charge for reporting?
Working with a factoring partner should be a relatively stress-free process. Part of this is being able to see reports on your accounts receivable, collections, credit limits, reserves and any timelines.
This information should be fully transparent and accessible so you’re always in the loop, and so you can hold your factoring partner accountable.
Q11) How are you funded?
The last thing you need to ensure is that the factoring company has adequate funding available so they can offer you capital when you need it.
Have a conversation with the factor about their experience deploying large amounts of working capital, and ask for reviews from existing clients.
At Liquid Capital, we understand what it takes for small, medium and emerging mid-market businesses to succeed – because we’re business people ourselves. Our company is built on a network of locally owned and operated Principal Offices, so whenever you’re talking to Liquid Capital, you’re talking directly to your funding source and a fellow business person.