Guide to Small Business Factoring Key Terms

Learn more about factoring by mastering some key terminology

By Rose Bricker

Action Steps
The best contacts and resources to help you get it done

Factoring

Factoring means selling your accounts receivable to a factoring company. The factoring company gives you a percentage of the receivables up front, and the balance when your customer pays the invoice or receivable. Factoring is not a loan, and your customers' ability to pay is the basis of your approval.

I recommend: Crestmark Capital explains factoring in depth, and has a FAQ section on the benefits of factoring, as well as a section that explains the difference between factoring and a bank loan.

Accounts receivable

Accounts receivable is the asset you use to raise money through factoring. Large and medium businesses have used this method of raising money for ages but small businesses have only started using it recently.

I recommend: United Capital Funding explains how accounts receivable can be used to increase cash flow through factoring.

Factors advance, advance rate and installment

A factors advance, also known as an advance rate or installment, is the amount of money you receive from a factoring company before it collects on your invoices.

I recommend: The Invoice Factoring Group explains invoice factoring and factors advance in detail.

Reserves and holdbacks

A reserve, also called a holdback, is the amount money you receive from a factoring company after it collects money from your customer, minus its fee.

I recommend: Rexford Funding explains what a reserve is in much more detail. It also publishes the definitions of many other factoring terms on its site.

Factoring fee

Factoring companies describe factoring fees in terms of percentages, which can range from 1 to 3 percent of your accounts receivable.

I recommend: First Pacific Capital has in-depth information to help you understand how factoring fees work, with examples.

Working capital

Working capital is the amount of money you have on hand to pay your bills and employees. Sometimes your cash flow may be very little when compared to your accounts receivable. In order to get cash influx into your business, you sell your accounts receivable so you have more cash to work with.

I recommend: Planware explains the working capital cycle to help you better understand how your accounts receivable play into your working capital.

Action Steps
The best contacts and resources to help you get it done

Choose reputable factoring companies for small business

Ask different factoring companies about the size of their typical client. Find out if you are required to commit to a monthly minimum transaction.

I recommend: Visit Buyer Zone to get free quotes from multiple small business factoring providers, or go to Get Factored where the leading factoring companies are listed ready to compete for your business.

Check your client's credit

In order for a business factoring company to work for you, your clients must have relatively good credit. It's important for the factoring company that they are able to get paid for the original invoices.

I recommend: Before considering business factoring for your company, check with Experian and Dunn and Bradstreet to find out more about your client's credit rating and payment history.

Meet your increasing business demands

As your business grows, you don't need slow paying clients holding you back. Business factoring keeps your cash flow moving along so you can reach your business goals.

I recommend: Get started with online small business factoring services today by contacting a factoring company like 21st Capital and Invoice Factoring for your business needs.

Helpful advice for making the most of this Guide

• •  Establish a system of periodically monitoring communication between your clients and the small business factoring services you choose. Make sure that they are professional, friendly and courteous at all times.
• •  Before signing a contract, negotiate the price of the factoring service to save money with a discounted rate or a reduction of fees.

Guide to Small Business Factoring Education and Training

Get an education in small business factoring services to help your business grow

By Rose Bricker

Action Steps
The best contacts and resources to help you get it done

Get the education you need to work in the factoring business

More companies are turning to factoring their account receivables, so getting a broker's license in factoring can advance your career.

I recommend: The Paper Source offers three different courses, starting with a beginner’s course and finishing with a comprehensive class on factoring software. Triple-AAA of the Financial Service & Consulting Network offers information on how to get started as a loan officer and factoring broker in a short period of time.

Find online training for employees of factoring companies

You can find most anything online these days, and that includes training in factoring. Some factoring companies provide brokerage training for you, including entry-level training and training that teaches highly advanced factoring skills.

I recommend: FactorHelp provides training for all levels, so you can find the specialized training your employees need. Rexford Funding offers broker training in factoring that you can customize for your staff.

Use factoring software to increase your factoring productivity

Small business factoring education and training should include training in factoring software. By using the software, you will better understand what factoring is all about, and learn how to effectively manage your cash flow and customers.

I recommend: FactorFox is a factoring business software that factoring companies use to save themselves work. The software makes the process of factoring bookkeeping faster and less prone to error. FactorSoft from Bayside Business Solutions is another software designed for a factoring company. It handles all aspects of your factoring business by managing the factoring and accounts receivable. Distinctive Solutions offers Factor/SQL and eFactor to factoring companies as software they can use in their business. Factor/SQL lets factoring companies manage all their accounts; the package sells for a reasonable price, and has been in use for over 20 years. EFactor lets clients of factoring companies check their accounts and keep abreast of all their factoring business.