What is a Factoring Company?

What is a factoring company and how does it work?

When a person researches the types of things searchers online want to know about factoring companies, one of the most common questions asked first and foremost is inevitably, “What is a factoring company?”


The simple answer is that it’s a firm that purchases new and current invoices that have yet been paid from other companies at a discounted rate from the original invoice totals. The factoring company then attempts to collect the amount of debt owed from the original client.


It’s a relatively fast way that some businesses get cash, as opposed to trying to go through the process of obtaining a bank loan and risk rejection.


What is a factoring company, a debt collector?


A Factoring Company is Not a Debt Collector though at first glance, it may seem that a companies that factor are the same thing as a debt collector. There are key differences that distinguish the two, however.


For one, factoring companies usually buy account receivables that are still considered current and in good standing. While debt collection agencies tend to focus on debts that are 60 days past due or older, factoring companies buy invoices that generally have been billed in the most-recent 30 days, and can be an excellent resource to help other businesses improve their cash flow situations, if a firm with a quality reputation is used.


Secondly, factoring companies tend to charge a lot less in fees to their clients — generally between 3% and 7% — while collection agencies tend to charge between 25% and 50% to collect the debts, because they are generally older and harder in nature to collect.


The timing of the payments differs, too. Selling your current accounts receivable invoices to a factoring company tends to bring you immediate cash, before the attempts to collect the monies owed are made. With a debt collection agency, however, you receive your funds only after the company in question has received the past-due payments, which can be a time-consuming and tedious process — and not always successfully completed.



First and foremost, one good way to determine the best invoice factoring company to suit your individual business needs is to get feedback from other business professionals in your field regarding the companies they’ve used. Word of mouth can be a great resource to determine the reputation of the company you’re considering using.


Outside of direct personal or business recommendations, time spent thoroughly researching the factoring company is of utmost importance. Ensure you find a great factoring company that possesses in-depth and current knowledge concerning the entire process, and offers competitive rates to boot.


Overall, you want to find a great company that specializes in your industry — you don’t want your field to be foreign to them. Plus, you want a factoring company that’s established and an expert in the industry, not some fly-by-night person trying out a new gig.


Literally search for “factoring company reviews,” and check out any firms you are considering using by name, comparing them to any complaint boards and other BBB ratings you can uncover.


How to Get Cash Via an Invoice Factoring Company


Companies can receive quick cash when they are low on funds by selling their applicable accounts in good status to a factoring company in order to get paid fast, minus the factor fee that the factoring company charges to collect the accounts.


The procedure for receiving money for your outstanding invoices is relatively straightforward. Once you’ve decided on a firm to utilize, the factoring company will verify that the invoice and the debtor are both in good standing credit-wise. They will also validate the details of the amounts owed and other significant information before approving the debt and funding your business, potentially as early as the next business day.


Instead of waiting 30 or 60 days for payments, certain companies find they can use a factoring company to advance them approximately 70% to 90% of their invoice amounts — and get the cash in a fast 24 to 48 hours.


Once the remainder of the invoice is paid to the factoring company, they then remit that balance — minus their fee — to the client.

So to answer the question what is a factoring company?  The correct answer is a company that buys current receivables that they believe are in good order and will be paid, at a slight discount, so that the seller of the invoices can have immediate or quick cash flow to keep their business growing and/or moving along.What is a Factoring Company?



What Do I Need to Start a Factoring Company?


All this talk about collecting monies may make it seem like a good idea to start your own factoring company. Take care, though, because starting this type of firm requires having an adequate line of capital in order to fund the business, which is essentially in the business of providing cash to others.


Once you’ve ensured you have enough credit and capital to finance a factoring business, you must tap into other resources to get your brick-and-mortar and/or online offices established. It helps to hire a lawyer who is well versed in the factoring business start-up process, one who understands recourse versus non-recourse financing, the latter of which involves the collection risk being assumed by the factoring company itself.


It takes careful preparation before jumping into this field, and requires not only serious funding, but also the ability to evaluate credit, collateral and delve into the entire, sometimes complex, collections process. Couple that knowledge with the ability to understand the laws that govern the factoring company collections procedure in your state and also the fact that your searching the term, what is a factoring company?


Beginning a company in this industry also requires time to establish a reputation and a marketing budget to make yourself and your new venture known as a new player in the field.