Choosing a factoring company

Understand this lender type

A factoring company purchases eligible receivables and commonly advances a portion of invoice value before the customer pays. Fees, reserves, recourse, and collection responsibilities determine the practical outcome. Because the customer’s payment is central, the factor examines invoice quality and customer credit as well as the selling business.

How to assess the fit

Compare providers using a realistic sample of invoices with different sizes and payment dates. Calculate cash received immediately, fees over the expected collection period, and the reserve released afterward. Ask how new customers are approved and how quickly additional invoices can become eligible for funding.

Questions that deserve an answer

The cheapest headline fee may exclude minimum monthly charges, concentration limits, aging charges, or termination costs. Customer notification and collection tone can affect commercial relationships. Find out who handles disputes and whether the business must repurchase unpaid invoices. Check existing security agreements before promising receivables to another provider, because competing claims can delay funding.

Compare providers with the same real invoice pattern

A factor affects both funding and collection administration. Give each prospective provider the same anonymized invoice pattern: customer concentrations, typical terms, late payments, credits and disputed balances. Ask how each category is treated. A strong initial advance percentage is only useful when the invoices qualify and the agreement explains what happens after the customer payment date.

Follow the money through a full settlement statement. An invoice can generate an advance, fees, a reserve and a later release; those items should reconcile to the eventual cash retained by the business. FundThrough’s own transaction documentation illustrates why fees and reserves require separate columns. Its overdue-invoice guidance also shows that customer delays can lead to chargebacks under a provider’s process. Those are examples of issues to examine, not universal terms.

Source: BDC: how factoring works · FundThrough: late customer payments and chargebacks · FundThrough: transaction reporting and reserve reconciliation

Work through a realistic scenario

A fictional factor advances 85% of a $20,000 invoice and holds $3,000 as a reserve. The business receives $17,000 initially. If the customer pays in full and the assumed total fee is $500, the remaining release is $2,500, leaving $19,500 overall. If a further $200 charge applies because payment is late, the release becomes $2,300. These invented terms show why an 85% advance is neither the total cash received nor the total cost. Obtain the actual timing and fee calculation for your invoice.

Make customer communication part of the decision

Ask to see the notice customers will receive and the process for matching payments to invoices. Decide who follows up on disputes, how incorrect payments are corrected, and when the business is notified of a problem. Compare factoring with a receivables-backed line as well as waiting for collection. The appropriate structure depends on cash timing, reporting capacity and how much control the owner wants over the collection relationship.

• What triggers a chargeback, and how much would the business owe?
• Are reserves released invoice by invoice or across the whole account?
• Who contacts customers and resolves credit notes or disputes?
• What minimum volume, termination or additional service charges apply?

Your next-step checklist

• Sample invoice-level cost calculation
• Recourse and dispute process
• Customer notification and collection approach
• Minimums, reserves, and contract termination