Best Factoring Companies Of 2024

 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.