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The Best Factoring Companies of 2019

By
Sean Peek
,
business.com writer
| Updated
Jun 25, 2019
Home
> Finance
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Many small businesses struggle with cash flow, especially when they are just starting out. A new business may be in good financial standing, but is cash poor and needs to pay its employees. Often, businesses in this situation have a stack of unpaid invoices from their customers, meaning the money is coming, just not as soon as they need it.

One of the most popular methods to generate cash is to factor your invoices. Factoring is a financial transaction where a business sells its accounts receivable to a third party at a discount. Invoice factoring companies unlock cash that is caught up in your customers' unpaid invoices, providing you with enough money to continue on to new projects.

After you have completed a project for a client or customer, you send the client an invoice, as usual. The factoring company immediately pays you a percentage of that invoice so you can pursue more work. When the customer pays their invoice, the money is paid to the factoring company, which takes a cut for its services.

In many cases, factoring is the best option for small businesses to sustain healthy cash flow. However, other businesses may benefit more from a traditional loan. If you're seeking alternative financing options, check out our recommendations on business loan and financing options.

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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 working with construction companies.

Most of the services on our list below work with startups, and many will not turn you away if you have poor credit or a bankruptcy. Paragon Financial is a non-recourse 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, too, on the creditworthiness of your customers. Factoring companies will not purchase invoices if your customers are a high risk.

The selection of which service is best for you 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. All the services we've listed have a 24-hour approval time and a 24-hour funding time. All of the services we've listed are available nationwide, and most work with startup companies.

What Are the Best Factoring Companies?

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 wish to factor all your invoices, choose a service with no invoice minimum. The best companies will not have a commitment requirement, so you are under no obligation to sell your accounts in the future.

Some factoring companies require up to 24 months of commitment; 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%.

Solid customer service is something you can expect from the best factoring services. Look for a factoring company that offers a dedicated account manager to help you when you have questions or concerns. Consider, too, the ease of contacting the company. All the companies we reviewed offer the standard email and phone options; others also offer local branches so you can meet with representatives in person.

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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 only 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 lose work or, worse, damage relationships with clients, vendors and employees. For construction companies, factoring can help you secure critical materials for your next job site. 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 solid long-term solution that 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 that 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 so they can grow the business.
  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 loan or 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 worry about surrendering 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 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 directly 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 solve the underlying needs or fix fundamental financial problems.

Another risk is with recourse factoring – the most common form of factoring – in which you agree to buy back any accounts that your factoring service cannot collect. Generally, you receive around 80% of the total amount, and whatever amount the factoring company initially fronts you, you would have to repay. This can put you in a worse position than you were in before you factored. If recourse factoring seems too risky, consider Factor Funding, as it offers non-recourse 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, it's a good idea to 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.

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 the processes the companies use (from application and approval to funding). With eligibility requirements, we looked at included the number of days an invoice can be overdue and the maximum amount a company will factor monthly. We also looked at whether or not a company offered non-recourse 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 to also gauge customer support. While some companies weren't as responsive, most of the companies we reached out to quickly responding, supplying the requested information. On the phone, representatives tended to be knowledgeable and very helpful.

Parting Advice

We consider all of the services we've reviewed to be good, reputable companies. However, the best factoring company for you 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 non-recourse 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 has the highest ceiling of days, while Riviera Finance has no ceiling at all. Charter Capital doesn't accept delinquent accounts, so that's something to watch out for.

Finally, consider the customer service and support that each company provides. They will, after all, be working with your customers – you want to be sure your customers 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 just 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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• 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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