We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

What are the Best Tips for Small Business Factoring?

Malcolm Tatum
By
Updated May 17, 2024
Our promise to you
WiseGeek is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At WiseGeek, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject-matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

Small business factoring is a financial strategy that allows smaller companies to make use of their accounts receivable now rather than waiting for customers to remit payments for those currently outstanding invoices. The process essentially involves selling the receivables for a specific billing period to a lender known as a factoring company, which pays a high percentage of the face value of those invoices to the debtor, with more to follow as the debtor’s customers actually do send in payments. While this type of third party financing can be very advantageous, it is important to consider the business model of the lender, their collection processes, and the amount of factoring fees they keep in return for their services.

There are a number of small business factoring services in operation today. While all offer the same basic solution to temporary cash flow problems, not all of them operate in exactly the same way. For this reason, it is important to get an idea of how a prospective partner works with its clients before making any type of commitment. Take the time to find out if the lender sets up a branded lockbox for the receipt of payments, or if your customers must remit payments addressed to the lender. Determine how long it takes for the lender to evaluate and approve the submitted accounts receivable and what percentage of the value of those receivables is tendered up front. It is also important to identify how long it takes for the payment to be received once approval for a given billing period is obtained.

Along with understanding how and when funds are provided for the small business funding, it is also crucial to get an idea of how much interaction the small business factoring will have with your clientele. Some will work closely with your accounting team to collect past due invoices, while others will not involve your business in the process at all. When that is the case, ask to see templates of collection letters that are sent out for invoices, that are 30, 60, and 90 days past due. Also ask to see the scripts that collections agents use when contacting your clients. Depending on the approach that the factoring company takes to the collection process, your relationship with your clients could either be strengthened or irreparably broken, something that is not in the best interests of your business in the long run.

It is also important to consider the fees that the small business factoring partner will ultimately keep for rendering their services. Typically, this is small percentage of the face value of the invoices that were approved as part of the loan arrangement. Depending on where the lender is based, that amount may be anywhere between three and ten percent of that face value. Keep in mind that small business factoring services that tend to offer a wider range of services and work with you in collecting past due invoices will probably charge a little more than those who provide basic services and handle collections without your input. Since protecting your good name with your clients is important to the future of your business, going with the small business factoring company that is a little more flexible and will work with you to resolve issues is a better option over the long-term.

WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Malcolm Tatum
By Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing to become a full-time freelance writer. He has contributed articles to a variety of print and online publications, including WiseGeek, and his work has also been featured in poetry collections, devotional anthologies, and newspapers. When not writing, Malcolm enjoys collecting vinyl records, following minor league baseball, and cycling.
Discussion Comments
Malcolm Tatum
Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing...
Learn more
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.