Best Factoring Companies Of 2024

Use these tips to compare factoring companies:

• Confirm eligibility criteria. Knowing each company’s requirements is essential when you’re making a list of potential factoring options for your business. Some factoring companies require a certain amount of monthly invoices to qualify or that the invoices be less than 90 days old.
• Consider each company’s advance rates: The factoring advance rate is the percentage of the invoice value that a company will pay you upfront. Some companies offer 100% advance rates while others limit advances to 60% of the invoice value.
• Make note of financing limits: Various factoring companies offer different financing limits. Be sure your preferred factoring company offers financing limits that meet your needs. For example, some offer limits up to $10 million while others offer limits up to $2 million.

Invoice factoring is a type of financing that allows businesses to sell their outstanding invoices to a factoring company in exchange for a portion of the invoice amounts upfront. The invoice factoring company—not the original business—is then responsible for collecting payment from customers.

Invoice Factoring vs. Financing

In contrast to invoice factoring, invoice financing does not involve selling invoices to a third-party factoring company that becomes responsible for collections. Instead, a business that uses invoice financing borrows money that is secured by the value of one or more outstanding invoices. The business remains responsible for collecting the invoice balance, and once an invoice is paid, the business repays the loan.

With invoice factoring, the creditworthiness of the customers is most important; on the other hand, invoice financing lenders look at the borrowing business’ credit. This means that invoice factoring is best for new businesses that don’t yet have a strong credit profile, while invoice financing is suitable for established businesses with good credit.

Invoice factoring involves a business selling its outstanding invoices to a third-party factoring company in exchange for a portion of the balance upfront. Factoring companies typically buy invoices for between 70% and 95% of the total invoice value—known as the advance rate. Under this approach, the factoring company becomes responsible for collecting outstanding invoice balances, not the business itself.

Once the outstanding invoice balances are collected, the factoring company pays the business the remaining balance minus the factoring fees. Factor fees generally range from 0.50% to 5% per month an invoice remains outstanding and may be fixed or variable.

Invoice factoring agreements may also be recourse or non-recourse. If a business enters into a recourse factoring agreement and a customer does not pay their invoice, the business must buy that invoice from the factoring company at the end of the payment term. Under a non-recourse agreement, the factoring company bears all of the risks of nonpayment.

Each invoice factoring company imposes its own eligibility requirements and application procedures. In general, businesses should follow these steps to work with an invoice factoring company:

1. Evaluate financing options. Many factoring companies require that businesses have limited or no access to traditional financing options to qualify for invoice factoring. So, before you resort to invoice factoring, review available financing options like small business loans and lines of credit. If your business is in a risky industry or is otherwise unable to obtain traditional financing, invoice factoring may be a good fit.

2. Research factoring companies. Before entering an invoice factoring agreement, research factoring companies based on qualification requirements, as well as advance rates, factor fees and whether rates are variable or fixed. Also evaluate the availability of non-recourse versus recourse factoring agreements, and read online reviews to gauge each company’s reputation.

3. Compile documentation. Because of the risk involved in invoice factoring, factoring companies typically require businesses to submit extensive personal and business tax returns and business financial records—usually going back at least three years. You may also be asked to provide accounts receivable and accounts payable aging reports to demonstrate how promptly customers typically make payments.

4. Complete formal application. Finally, complete the factoring company’s application form. Each factoring company has its own application process, so talk to a representative to learn more about the relevant application form, approval process and average turnaround time.

A major advantage of invoice factoring is that funds can be secured within a matter of days once an invoice is approved by the factoring company. This makes factoring faster than most traditional forms of financing.

Invoice factoring companies feature different eligibility requirements, advance rates and factor fees than their competitors. What’s more, some factoring companies offer non-recourse agreements, whereas others offer exclusively recourse factoring. Consider these factors when choosing an invoice factoring company:

Funding Qualifications

Invoice factoring is easier to qualify for than traditional forms of financing, but businesses must still meet certain requirements. And, because the factoring company assumes the risk of nonpayment, factoring companies are also concerned with the creditworthiness of the business’ customers.

These are some common qualifications imposed by factoring companies:

• The company is incorporated in the U.S.
• The company sells to businesses, not directly to consumers
• Monthly sales are at least $5,000
• The business has limited to no access to traditional financing
• Customers are creditworthy
• Customers have 30 days or more to pay invoices—but not more than 90 days

To qualify for invoice factoring and meet the requirements above, factoring companies often require businesses to submit personal and business tax returns for the last three years, financial statements going back three to five years and accounts receivable and payable aging reports.

Advance Rates

The advance rate is the percentage of outstanding invoices the factoring company pays the business upfront. The percentage typically ranges from 70% to 95% but hovers around 80% for most businesses. Factors like the stability of the business, as well as the business’ industry and transaction history typically determine potential advance rates.

For example, a business in the construction industry is considered riskier than more traditional businesses, so the advance rate may be closer to 60%. In contrast, businesses in the transportation industry are considered the least risky and advance rates may span up to 97%.

Factor Fees

Factor fees—sometimes referred to as discount or factoring rates—are the fees companies charge over time and until an invoice is paid in full. These fees generally range from 0.50% to 5% and may be fixed or variable. In the case of fixed factor rates, the rate stays the same until the invoices are repaid. With a fixed rate of 3%, the business is charged a rate of 3% of the total invoice amount when the invoice is paid, regardless of when during the term the invoice is paid.

With variable factor fees, rates increase along with how long it takes the customer to pay off the invoice. For example, the factor rate may start at 1%, increase to 2% in the second week and to 5% in the third week. Alternatively, the rate may start at 2% and remain there for the first 30 days, increasing in set increments after that.

Recourse vs. Non-recourse Agreements

Factoring agreements may be recourse or non-recourse, which dictates what happens if an invoice goes unpaid. If a business signs a recourse factoring agreement and the invoice is not paid, the business must buy back the invoice or trade it for another invoice of equal value. Recourse agreements reduce the risk posed to invoice factoring companies and are more common—especially in high-risk industries like construction.

Under a non-recourse agreement, the factoring company assumes the risk of nonpayment, and the business is not required to buy back any invoices—even those that go unpaid. For this reason, non-recourse factoring agreements are typically more expensive and are reserved for industries that pose less risk to factoring companies.

We reviewed lenders based on 16 data points in the categories of factoring details, costs, eligibility and accessibility, customer experience and the application process. We chose the best lenders based on the weighting assigned to each category:

• Loan details: 30%
• Loan cost: 25%
• Customer experience: 20%
• Eligibility and accessibility: 15%
• Application process: 10%

Within each major category, we also considered several characteristics, including available advance rates, financing amounts and applicable fees. We also evaluated each company’s customer support tools, borrower perks and features that simplify the borrowing process—like online applications and mobile apps.

Where appropriate, we awarded partial points depending on how well a factoring company met each criterion.

To learn more about how Forbes Advisor rates lenders, and our editorial process, check out our Loans Rating & Review Methodology.