What is an invoice factoring company: Costs, examples & more

Stuck in a cash flow crunch? An invoice factoring company could be exactly what your business needs.

Picture this: no more nail-biting waits for clients to pay or juggling bills like a circus act.

Instead, imagine turning those dusty invoices into instant capital.

Forget stuffy banks and mind-numbing loan applications. Factoring strips away the BS, giving you quick access to the funds you've already earned.

Ready to kiss those sleepless nights goodbye and focus on growing your company? Keep reading.

What is a factoring company?

An invoice factoring or invoice financing company is a financial partner that turns your outstanding invoices into immediate cash, so you can keep your business moving without the wait.

They buy your unpaid invoices at a discount, giving you quick access to funds while we handle the hassle of collecting from your customers.

How do factoring companies work?

Suppliers (exporters) often sell goods to their buyers (importers) on deferred payment terms, which means they may have to wait up to 120 days for payment.

This can lead to cash flow problems - when wages and other running costs need to be paid - as well as an inability to invest in company growth.

Invoice financing companies bridge this cash flow gap by buying invoices from the supplier in exchange for liquid capital once goods are shipped. The finance company then collects payment from the buyer when the invoice is due.

The financier advances a percentage (usually 70-90%) of an outstanding invoice to the exporter, with the balance (minus a pre-agreed fee) sent once the importer has paid the invoice.

Invoice factoring process: step-by-step with examples

1. An exporter invoices an importer for products or services with delayed payment terms.
2. The factoring company now advances a percentage of the value of the invoice directly to the exporter.
3. The factoring company then waits for the invoice to be paid on the due date.
4. When the invoice is paid, the factoring company sends the balance payment (minus a pre-agreed service fee) to the exporter.

If the importer doesn't pay the full invoice amount, liability for the invoice payment depends on the type of invoice finance requested.

In non-recourse financing, the finance company assumes liability for the loss, whereas, in recourse financing, the exporter would be responsible for chasing the importer for payment.

Invoice factoring example with numbers

Supplier Ltd owns $ 1,000,000 (USD) of unpaid invoices for goods shipped to Buyer Ltd on 120-day terms but needs access to cash now. A factoring company (Stenn) agrees to advance 90% of its face value ($900,000 (USD)) to Supplier Ltd.

Buyer Ltd later pays the $1,000,000 (USD) invoice amount to Stenn on the agreed date.

Stenn then pays the remaining 10% ($100,000 (USD)) to Supplier Ltd, minus a service fee.

For more information on invoice financing and how it works, check out our walkthrough video:

Invoice Financing explained

Invoice factoring advantages

Whether you're running a scrappy startup or steering a corporate behemoth, factoring's got some sweet perks tailored just for you.

For SMBs

• Cash flow on steroids: say goodbye to those awkward "the check's in the mail" moments. Factoring turns your invoices into instant cash, keeping your business engine revving.
• Growth fuel: need capital to seize an opportunity? Factoring got your back, no strings (or stuffy loan officers) attached.
• Credit Score? What Credit Score?: unlike those picky banks, factoring doesn't care about your credit. It's your customers' credit that matters.
• Outsourced collections: let the factoring pros chase down payments while you focus on crushing your business goals.
• Flexibility: scale your funding up or down based on your invoices. No fixed loan amounts here, baby.

For enterprises

• Balance sheet beautification: factoring isn't debt, it's an asset sale. Keep your balance sheet looking great for investors and stakeholders.
• Global domination: international invoices? No problem. Factoring helps navigate the murky waters of cross-border payments.
• Seasonal smoothing: got business cycles more volatile than a rollercoaster? Factoring helps even out your cash flow.
• Risk management: factoring companies often offer credit insurance. It's like a financial bulletproof vest for your big deals.
• Working capital wizardry: free up cash tied in receivables to invest in new tech, expand operations, or whatever floats your corporate boat.

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Get ready for the future today: Strategic planning for sustainable growth using invoice financing.

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Which companies can use factoring? 

Businesses in any industry can use invoice factoring.

However, the service significantly benefits companies in sectors that trade using deferred payment terms.

These typically include:

• Manufacturing
• Construction
• Technology
• Food and beverages
• Wholesales and distributors
• Engineering
• Service providers (companies in industries like staffing, consulting, or marketing)
• Logistics and transportation
• International trade businesses
• Startups

How much does invoice factoring cost?

Invoice factoring costs are typically charged as a percentage of the invoice amount.

For example, if a factoring company charged a 1% fee for an invoice sum of $100,000 (USD), it would take $1,000 (USD) from the final invoice amount.

Other factors can influence the cost of invoice financing services.

These include:

• The invoice amount - the higher the cost, the greater the risk for the financier.
• The length of payment terms - longer payment terms often result in higher fees.
• Buyer quality - financiers may charge higher fees to protect themselves from risky buyers.

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Wondering how a factoring accounts receivable company works? Find out that and more on: 5 advantages of accounts receivable finance for suppliers.

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How much do factoring companies charge? Fees fully explained

Alright, let's break down the factoring fee jungle without the finance-speak BS:

• Discount Rate: the big kahuna of factoring fees. Think of it as the slice of pie the factor takes, usually 1-5% of your invoice value. The longer your customer takes to pay, the bigger the slice.
• Service Fee: some factors slap this on for "administrative costs." It's like a cover charge at a club but for your invoices. Usually a small percentage, but watch out for sneaky high ones.
• Advance Rate: not a fee but impacts your cash. You might get 70-90% upfront, with the rest (minus fees) when your customer pays. Higher advance? More cash now, but potentially higher fees.
• Monthly minimum fee: The "you gotta pay to play" fee. If you don't factor in enough invoices, you might still owe this. It's like a gym membership - use it or lose it.
• Termination Fee: the "thanks for playing, now pay up" fee if you bail on your contract early. Read the fine print, folks.
• Credit Check Fee: some factors charge to snoop on your customers' credit. Because apparently, Google isn't free.
• ACH/Wire Fee: the "we're gonna nickel and dime you for moving money" fee. Watch for these little charges.

Remember, not all factors charge all these fees.

Shop around, ask questions, and don't be afraid to negotiate. Your cash flow is too important for a raw deal.

Is invoice factoring the same as a bank loan?

Invoice factoring is different from a bank loan because suppliers receive only the money that is already owed to them by their buyers. They get most of the money as an advance when goods are shipped, and the balance later.

An invoice factoring company provides instant cash to small businesses that need to cover short-term business expenses and can't wait for invoices to be settled.

Many exporters offer deferred payment terms to attract larger international buyers, so invoice factoring can provide exporters with access to money that would otherwise be tied up for months in unpaid invoices.

Applying for invoice factoring can be more convenient and time-efficient than applying for a bank loan.

Banks are often unwilling to assume the risk of lending to small businesses engaged in international trade.

SME exporters are more likely to be approved for invoice financing than for a bank loan, particularly if they are new firms or have patchy credit histories.

How to choose the right factoring company

If you're looking for a factoring company to finance your invoices, it's important to ensure it is the right company for your firm.

Consider the following when reviewing a provider:

• An understanding of your industry
• Experience working with multiple exporting companies of a similar size
• Credit limits that meet your needs
• Provision of non-recourse financing
• No maximum number of invoices submitted
• Flexible (willing to finance one invoice or a whole ledger)
• A high percentage of cash advance upon shipment of goods
• Easy and quick application process
• An excellent reputation

Using the above criteria will ensure that you find an invoice factoring provider that's right for you.

Invoice factoring FAQs: your burning questions answered

1. Are factoring companies safe?

Invoice factoring is among the safest and most convenient solutions for cross-border trade deals.

However, as with any financial agreement, business owners are always advised to carry out due diligence before working with any service provider.

2. What is the difference between traditional lenders and factoring invoice companies?

Banks and lenders play the long game - they're all about your credit score, collateral, and endless paperwork.

They'll loan you cash, sure, but they want it back with interest. Factoring companies?

‍They're in the now. They buy your invoices, giving you instant cash without the debt hangover. No credit checks on you, just your customers. It's not a loan, it's a sale.

You get your money faster, they handle the collection headaches.

3. Does the factoring company need to be local?

No. Many factoring companies offer online services nowadays.

We specialize in cross-border finance, working with suppliers and buyers who operate in different countries and arrange their financing via our online platform.

4. What is forfaiting?

Forfaiting is an example of 'non-recourse financing' in which the finance provider (the forfaiter) assumes the risk associated with non-payment by the importer. 

5. Can invoices be factored selectively?

Selective invoice factoring - or spot factoring - is when a supplier chooses specific invoices to factor rather than selling all of its unpaid invoices. 

This allows suppliers to increase their cash flow with capital advances without incurring fees based on their whole ledger.

6. What is reverse factoring?

Reverse invoice factoring involves a buyer using a factoring company to pay its supplier's invoice, giving the buyer more time to pay the invoice later. 

Reverse factoring benefits all parties by freeing up capital for the buyer and supplier, with the factoring company taking a service fee.

Why wait for payments when you can have cash in hand now?

Stenn’s invoice financing service lets you unlock funds from your outstanding invoices in as little as 48 hours—no collateral, no hassle.

Stop letting long payment terms strangle your cash flow. With us, you get 90% of your invoice value upfront, so you can keep your business moving at full speed.

Whether you’re dealing with international trade or managing B2B transactions, we’ve got you covered. Get approved fast, boost your cash flow, and never stress about payments again.

Ready to take control? Get funded now with Stenn.