Question 1

What is invoice factoring?

Accepted Answer

Invoice factoring lets you sell unpaid customer invoices to a factoring company for an advance, often a large part of the invoice value, rather than waiting for customers to pay. When your customer pays, you receive the remainder minus the factor's fee. Approval often depends heavily on your customers' payment strength, not just your own credit.

Question 2

What are the downsides of invoice factoring?

Accepted Answer

It can be expensive compared with a bank line, fees add up if customers pay slowly, and some factors require long contracts or minimum volumes. Your customers may be told to pay the factor directly, which some owners dislike. With recourse factoring, you must buy back invoices your customer does not pay. Read the fee schedule and contract terms carefully.

Question 3

What is the difference between recourse and non-recourse factoring?

Accepted Answer

With recourse factoring, you must repay the factor if your customer does not pay the invoice, so you keep the credit risk. With non-recourse factoring, the factor absorbs some of that risk, usually only for specific reasons such as customer insolvency, and charges more for it. Read exactly which situations non-recourse covers before signing.

Question 4

Is invoice factoring the same as invoice financing?

Accepted Answer

Not exactly. In factoring you sell the invoices, and the factor often collects from your customer. In invoice financing, or receivables lending, you borrow against the invoices and usually keep collecting from customers yourself. The terms, costs and how visible it is to your customers differ, so ask which structure an offer uses.

Question 5

Can I get a loan on a purchase order?

Accepted Answer

Yes, purchase order financing exists. A financier pays your supplier directly so you can fulfill a confirmed order from a creditworthy customer, then gets repaid when the customer pays, often combined with invoice factoring. It suits product businesses with large orders and thin cash. It usually does not fit service businesses or orders from unproven customers.

Question 6

How can I get funding for inventory?

Accepted Answer

Options include inventory financing secured by the stock itself, a line of credit, purchase order financing for confirmed orders, supplier payment terms, and short-term working capital. Lenders look at how quickly your inventory sells and what it would be worth if sold off. Match the term to your inventory cycle so the stock sells before payments pile up.

Question 7

What is inventory financing?

Accepted Answer

Inventory financing is a loan or line of credit secured by the products you hold for sale. Lenders usually advance only part of the inventory's value, since stock may sell for less in a forced sale. It suits retailers, wholesalers and distributors with predictable sales. Perishable, custom or slow-moving stock is harder to finance.

Question 8

Which businesses use invoice factoring?

Accepted Answer

Mostly businesses that invoice other businesses or governments and wait for payment: trucking and logistics, staffing agencies, manufacturers, wholesalers, construction subcontractors and some service firms. Factoring rarely works for businesses that are paid on the spot by consumers, since there are no invoices to sell. Your customers' payment history matters a lot.

Question 9

What is seasonal working capital?

Accepted Answer

Seasonal working capital is money a business needs to get through predictable highs and lows, such as stocking up before a busy season or covering payroll in a slow one. Lines of credit, inventory financing and short-term loans are common tools. Lenders review several months of deposits, so explaining your seasonality helps them read your file correctly.

Question 10

How much does invoice factoring cost?

Accepted Answer

Factoring fees are usually a percentage of the invoice value, often charged for each period the invoice stays unpaid, plus possible setup, service or minimum volume fees. The longer your customers take to pay, the more it costs. We do not publish typical rates because they vary by factor, industry and customer quality. Ask for a full fee schedule.

Question 11

Will my customers know I am using invoice factoring?

Accepted Answer

Often, yes, because many factors ask customers to pay them directly and may verify invoices. Some providers offer non-notification or confidential arrangements, usually for larger or stronger businesses. Ask how the factor contacts your customers and how professional that process is.

Question 12

How do I fund a large order before my customer pays?

Accepted Answer

Look at purchase order financing if you need to pay a supplier to fill a confirmed order, or invoice factoring if you have already delivered and invoiced. A line of credit can also bridge the gap. Make sure the profit on the order covers the financing cost.

Question 13

Can a new business use invoice factoring?

Accepted Answer

Often, yes, because factors focus on the creditworthiness of the customers who will pay the invoices. A new business with solid commercial or government customers may qualify even with little history. Your invoices must be for completed work and free of other liens.

Invoices, purchase orders and inventory: 13 questions