Choosing a factoring service doesn’t have to be complicated. Here are three things to consider when selecting one for your business:
What type of factoring does your business need?
How much of your outstanding invoices do you need funded and when do you need it?
How much are you willing to pay?
We will help you answer these questions below, but if you already know what you need and just want to see our recommendations for the best factoring service, visit our best picks page.
The first step to choosing the right factoring service for your business is figuring out which type of factoring you actually need. For instance, do you need a factoring service that covers all of your outstanding invoices upfront, or will a partial payment suffice? Do you prefer to keep receiving payments from customers, or will you hand collections over to the factoring company? And do you want to be held responsible to the factoring company if customers don’t pay? These are just some of the considerations we’ll cover below.
First, to help you better understand the many different types of factoring, here is an explanation of how factoring works, followed by a breakdown of the most common factoring services.
How factoring works
Factoring is an alternative method of financing that allows business owners to sell their invoices, or accounts receivable, to a third party, the “factor.” Factoring helps to fuel growth by providing the funds necessary to keep businesses going while waiting for customers to pay for outstanding invoices.
Here’s how factoring works in real life:
EcoNuts, an organic soap nut retailer that appeared on Season 4 of ABC’s “Shark Tank,” was unable to secure an investment deal, but still had a large purchase order from a major retailer on the line. The company opted to work with factoring company BlueVine to successfully fill the order. [See Related Story: BlueVine Review: Best Bad Credit Factoring Service]
“When [EcoNuts] came to us, they were limited by their working capital they had on hand to meet that demand,” said Edward Castaño, vice president of marketing at BlueVine. “They had so many outstanding invoices from TJX [parent company of TJMaxx, Marshalls, HomeGoods and the Sierra Trading Post], that it made it hard for them to fulfill orders.”
According to Castaño, EcoNuts didn’t have the cash to purchase the supplies and cover the salaries to fill the new orders, which put their growth trajectory at risk.
“[EcoNuts] used our invoice financing solution to unlock the cash trapped in their invoices to fulfill new orders and maintain their growth trajectory,” he said.