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The Best Factoring Companies of 2020

By
Sean Peek
,
business.com writer
|
Jan 14, 2020
Image Credit: wutwhanfoto / Getty Images
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As strange as it may sound, it's common for a small business to be cash-poor, even if the company is doing well. This is particularly true for startups, whose owners often find themselves staring at a stack of unpaid invoices from clients. Although money is coming, waiting for that influx of cash can put a halt to business, especially when other expenses are due sooner rather than later. 

One way to climb out of this hole is to factor your invoices. Factoring is helpful because it puts money in your pocket so you can maintain steady cash flow and avoid problems from the people you owe money to. However, factoring isn't for everyone; some businesses are better off with a traditional loan. If you're seeking alternative financing options, check out our recommendations for business loan and financing options

However, if you are considering factoring, we've examined a number of options and selected the services we think are best for various types of businesses. You can learn more about factoring services and our best picks below.

Best Picks

Pricing

Editor's note: Need a factoring service for your business? Fill out the below questionnaire to have our vendor partners contact you with free information.

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What Is a Factoring Company?

A factoring company ‒ also known as invoice factoring or accounts receivable factoring ‒ is a service that purchases your open, unpaid invoices and advances your business money to cover a portion of those invoices. In other words, you "sell" the unpaid invoices your clients or customers owe you for roughly 80 to 100% of the value of the invoice. 

After a factor purchases your receivables, they collect payment from your clients and customers directly. In some cases, a factoring company will operate behind the scenes, requiring you to contact the customer and collect their payment. 

Once your customer pays their invoice, you receive the remaining amount of the invoice from the factoring company, minus their fees. 

The primary reason businesses work with a factoring company is to open up their cash flow. Factoring is a good option if your business typically waits 30 to 60 days (or more) to receive payment from clients.

How to Select the Best Factoring Company

The number of factoring companies is vast, so it's important to carefully consider your business needs, what services are available to you and which companies have the best offers. 

First, ensure that you are eligible to use the service. Some factoring services work with specific industries, such as trucking, gas or oil. CapitalPlus, for example, specializes in factoring for construction companies. 

Most of the services we evaluated work with startups, and many will not turn you away if you have poor credit or a bankruptcy. Paragon Financial is a nonrecourse factoring company that ignores the personal credit of a business owner and, instead, focuses on the customer's ability to pay. While this is beneficial for businesses with poor credit, your ability to secure money from a factoring service depends on the creditworthiness of your customers. Factoring companies will not purchase invoices if your customers are high risk. 

Choosing the best factoring service for your business also depends on how delinquent your invoices are. Some companies don't accept delinquent accounts or only accept invoices that are up to 45 days delinquent. On average, most companies accept accounts that are overdue between 60 and 90 days. Riviera Finance, on the other hand, has no maximum number of days an invoice can be overdue for the company to buy from you. 

Last, consider the factoring service's approval and funding process. The best services have a quick turnaround time for approval and funding. Many of the services we evaluated will review your application (and notify you of their decision) within 24 hours, and all can transmit funds 24 hours from the time you submit an invoice to be factored. All of the services we've listed are available nationwide, and most work with startups.

What Types of Businesses Use Factoring Companies?

Generally speaking, any B2B (business-to-business) company that invoices their customers for goods and services provided giving 30- to 60-day terms can work with a factoring company. Common industries and businesses factoring companies work with include: 

  • Truck companies
  • Freight brokers
  • Manufacturing companies
  • Wholesale companies
  • Business and consulting services
  • Medical offices 

Alternatively, many factoring companies and financial entities won't work together, so if you already have a business loan, you might not be able to factor invoices. A factor secures its rights to your invoices via a lien to grant them first rights on the asset. However, most banks and financial companies file a lien that covers all of your company's assets, including your accounts receivable. A factoring company won't work with you if another financial entity already has first rights on your accounts receivable. 

In some cases, your bank may subordinate their position for your receivables so a factoring company can claim first rights, but the chances are slim. Accounts receivable is a valuable asset to use as collateral, and most financial entities won't let go of this asset lightly.

What Are the Best Factoring Companies?

After reviewing factoring services across the industry, our top-rated factoring companies are: 

The best factoring services do not charge startup or termination fees, and the percentage they charge for their services is low. If you do not want to factor all of your invoices, choose a service with no invoice minimum. (We've indicated in our reviews if the factoring service has an invoice minimum or not.) Some factoring companies require up to 24 months of commitment. (We also specify in each review if there is a commitment requirement.) The best companies don't require you to commit to the factoring service for a period of time, so you are under no obligation to sell your accounts in the future.

Pricing

Just like business lending services, factoring fees and rates are based on several different calculations and factors. Generally speaking, factoring companies consider the following when determining your rate: 

  • Your industry
  • Your customers' credit scores
  • How long it takes your customers to pay their invoice
  • The average value of the invoices you want to factor
  • The number of invoices you want to factor each month 

Most factoring services charge between 1 and 5%. However, many services discount the rate the earlier your customers pay their invoices. For example, a factoring company may charge a 2% rate for invoices paid within 30 days, plus 1% every additional week until the invoice is paid. This fee structure is beneficial for businesses that work with fast-paying clients, but your fees quickly add up with just one slow-paying customer. 

Your best option is to look for a service that offers a large percentage upfront and charges low fees. Universal Funding Corporation funds up to 95% of your invoices upfront and charges 0.55%. 

The best factoring services also provide excellent customer service. Look for a factoring company that offers a dedicated account manager who can answer your questions or concerns about the service. Consider, too, the ease of reaching the company. All of the companies we reviewed offer the standard email and phone options; others offer local branches so you can meet with representatives in person.

What to Expect in 2020

Due to technological advancement and companies' ongoing need for financing, the global factoring market is expected to reach $9.2 billion within the next five years, according to a Technavio study. Factors like active invoice payment, an increase in global trade and expanding small businesses have contributed to the market increase. 

Today, more than 7,000 banks and companies around the world offer factoring services. This has led to the merging of banks and technology. For example, blockchain has recently entered the factoring field, which resulted in a decrease in cost and an increase in profit margins. We predict that, in the year ahead, it will help stakeholders interested in factoring avoid risk, which will benefit the entire factoring industry. 

Including blockchain in factoring services places a specific code on invoices, which allows them to only be published once. We expect this to minimize duplicate invoices and prevent them from being paid twice. We also anticipate an increase in the number of companies incorporating blockchain-based invoice factoring into their services.

Benefits of Factoring Companies

Factoring can be a good option for improving your business's cash flow, and there are many benefits of working with a factoring service, such as:

  1. You get cash immediately. The most obvious benefit of working with a factoring company is that you get cash fast. Traditional payment terms require customers and clients to pay in 30, 60 or even 90 days. If you're waiting for an invoice for 90 days, you may damage relationships with clients, vendors and employees. For construction companies, factoring helps you secure critical materials for your next job. For agencies, having cash in hand helps you meet payroll so your employees are taken care of.

  2. Factoring is both a short- and long-term solution. Factoring can be a great way of funding your operation during the off-season when business is slow, you've hit a rough patch or your business is growing rapidly. It can also be a solution you use year-round to ensure steady cash flow.

  3. It's generally easier than applying for a loan. In many cases, a traditional business loan is still the best way to get an injection of capital, but it takes time and requires a lot of paperwork. Factoring is fairly straightforward, and many companies will put cash in your hand within 48 hours of applying. [Interested in a business loan or other financing option? Check out our best picks and reviews.]

  4. The requirements are straightforward. Generally speaking, you qualify if you operate a business with commercial or government clients (who have good credit), and if your business is free of liens, encumbrances and legal problems.

  5. New and small businesses can use factoring. Without an established credit history, new businesses may struggle to find a traditional lender who will offer them a line of credit. Further, small businesses may not have a strong enough profit margin to attract a lender. Many factoring companies, on the other hand, work with startups and small businesses.

  6. Your line increases with your growth. Factoring scales with your business, which means you get access to more funds as you gain more customers or clients.

  7. Your invoices are collateral. With a traditional business lender, your personal and business assets can be used as collateral. This can include real estate, business equipment, inventory, vehicles and intangible assets. With factoring, the invoices are your collateral, which means you don't have to surrender critical business or personal assets if your business is struggling.

Drawbacks of Factoring Companies

While there are benefits to using a factoring service, it can be a risky choice for a few reasons. The most obvious drawback is that you lose part of what would be a profit to fees. 

Consider these elements as well before working with a factoring service: 

  • Factoring rates are typically higher than traditional line of credit rates. Factoring gets cash in your hand quickly and with less paperwork compared to traditional lenders, but the rate is typically higher than that of a traditional loan. Your actual rate could range from 1 to 4% for 30 days.

  • Factoring companies may contact your customers. Most factoring companies communicate directly with your clients, and you do not want to burn bridges with loyal customers because a company represented your business poorly.

  • Factoring doesn't fix your financial problems. Traditional lines of credit can be used to solve any number of financial crunches your business encounters, such as keeping your inventory fully stocked or opening a new storefront. While a factoring service may temporarily improve your cash flow problems, it won't fix fundamental financial problems.

Another risk is with recourse factoring – the most common form of factoring – in which you agree to buy back accounts that your factoring service cannot collect. Generally, you receive around 80% of the total amount; whatever amount the factoring company initially fronts you, you must repay. Recourse factoring can put you in a worse financial position than you were in before you factored. If recourse factoring seems too risky, consider Factor Funding, as it offers nonrecourse factoring.

Before working with a factoring service, research its reputation. If it has a history or pattern of rude or harassing behavior, look elsewhere.

Factoring companies are not collection agencies. The main purpose of factoring companies is to improve your cash flow, not to harass your customers to pay a debt. If your customer is late paying, some factoring services notify your customers in writing, or they may call to ask for payment, but they generally do not drive customers away.

Still, do your due diligence that the company you choose has solid customer service and a helpful follow-up process that won't drive your customers away. [Are you looking for a collection agency? Check out our best picks and reviews of those services.]

If factoring seems too risky, merchant cash advances are another option to consider. They are yet another alternative to a traditional loan.

Frequently Asked Questions

How much do freight factoring companies charge?

Freight factoring companies, also known as trucking factoring companies, operate similarly to other factoring companies, and you can expect similar rates and fees. Rates vary by company, but usually start between 1 and 5%, and many freight factoring companies charge a lower rate for invoices that are paid quickly. 

Can you work with more than one factoring company?

No. You can only work with one factoring company at a time because it is too difficult to determine who has the first right to your company's outstanding invoices. To establish the first right on your receivables, factoring companies file a UCC lien so they can start collecting your invoices. 

Can I switch factoring companies?

Yes. If you switch to a different factoring company but still have outstanding receivables, you must arrange a buyout in which the new factor purchases the remaining invoices. Additionally, the UCC liens must be changed so the new factoring company establishes first right. Switching factoring companies can be an expensive process, especially if you signed a long-term contract with the original company. 

What is invoice financing versus factoring?

Many people use the terms invoice financing and invoice factoring interchangeably, but they operate very differently. A factoring company purchases the right to the value of your accounts receivable, whereas with an invoice financing company, you borrow against the value of your accounts receivable, but you still own your invoices. 

What is recourse versus non-recourse factoring?

The main difference between recourse and nonrecourse factoring is who is responsible if your customer doesn't pay their invoice. With recourse factoring, you are responsible for your customers' unpaid invoices, though your rates will be lower for the added risk. If you work with a recourse factoring company, make sure your clients have a good credit history. 

On the other hand, with nonrecourse factoring, you are not responsible for late or unpaid invoices. Rather, the factoring company accepts the risk, though nonrecourse factoring is more expensive than recourse factoring. 

Are factoring companies regulated?

In the United States, invoice factoring companies are not regulated by a formal government body. However, many factors are members of associations that self-regulate their practice, such as the International Factoring Association or the Secured Finance Network (formerly known as the Commercial Finance Association).

Our Methodology

When considering factoring services, we looked at two elements: features and eligibility. For features, we considered the rates and fees the factoring services charge and their processes (application, approval and funding). With eligibility requirements, we researched the number of days an invoice can be overdue and the maximum amount a company will factor monthly. We also checked whether the service offered nonrecourse factoring and what types of commitments they require of clients. 

We scoured websites and contacted dozens of factoring services to get answers to our questions and also to gauge their level of customer support. While some companies weren't as responsive, most of the companies we reached out to quickly responded, supplying the requested information. Overall, representatives from the services we evaluated were knowledgeable and very helpful.

Parting Advice

All of the services we've reviewed are good, reputable companies. However, the best factoring company for your business depends on your needs. Consider the rates and fees of each company, but remember that they're all in the same range.

Above all, make sure that factoring is the right step for your company. We recommend a company that offers nonrecourse factoring, such as Riviera Finance. Additionally, weigh how much you need to factor each month and how long you need to factor, as each company varies in what it will accept. American Receivable factors invoices that are 120 days past due while Riviera Finance will factor invoices regardless of how overdue they are. Charter Capital, by contrast, doesn't accept delinquent accounts.

Finally, consider the support that each company provides. They will, after all, be working with your customers – you want your customers to have a positive experience. Our best customer service experiences were with Riviera Finance and American Receivable. All of the services we've reviewed are solid choices; it boils down to what's best for you.

Downloadable Guides

Download Invoice Factoring eBook
Download Invoice Factoring eBook

Financing Alternatives for your Business

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In this eBook, you will learn how small to mid-sized companies can utilize alternative financing (invoice factoring) to obtain positive cash flow / working capital. We will also review the economic pulse of the market; to help determine if factoring is the correct vehicle to propel your business to the next level.

Product Sheet:
Product Sheet:

The FICO IFRS 9 Impairment Solution

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The FICO® IFRS 9 Impairment Solution is designed to help financial institutions efficiently and effectively comply with the new standard. However, it also lays the groundwork for long-term benefits. With it, institutions can:

• Enable their bank boards and senior management to make better informed decisions
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• Make forward-looking strategic decisions for risk mitigation in the event of actual stressed conditions
• Help in understanding the evolving nature of risk in the banking business

Learn More: Download the Product Sheet, The FICO® IFRS 9 Impairment Solution

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