Question 1

What is factoring?

Accepted Answer

Invoice factoring allows you to sell your unpaid invoices to third-party companies at a discount in exchange for upfront funding. The lender can advance up to 90% of the invoice value, and you’ll receive the remaining percentage once your customers pay their invoices.

Question 2

Is factoring invoices a good idea?

Accepted Answer

The answer will ultimately depend on your business's current needs. In general, invoice factoring is best for companies with large capital tied up to unpaid customer invoices and need quick access to cash. Additionally, invoice factoring is a viable choice if:

You work with reputable and highly credible customers.
Your business can afford the fees and other charges associated with the financing.
You have no collateral to pledge other than your customer’s unpaid customer invoices.
You’re working with a low credit score and can’t qualify for other types of loans (since factoring companies usually puts more weight on the customers’ credit standing than the borrowing company’s)

If that sounds like your business, invoice factoring might be an excellent decision for your company.

Question 3

What is a typical factoring fee?

Accepted Answer

Invoice factoring fees (also known as discount rate) may vary from one lender to the next. Typically, the cost of factoring, unpaid accounts receivables will range from 1% to 5% of the total value of the invoices.

Certain factors may also come to play when lenders determine the fees charged to business owners. This includes the volume of the invoices financed, business industry, whether the financing is a recourse or non-recourse factoring, customer creditworthiness, and the invoice term.

Moreover, the lenders may also charge additional fees for the late payment of invoices. For instance, a factor may charge 1.5% of the total invoice value for every 30 days the invoice remains unpaid. As you research the best factoring for your business, be sure to ask about their terms to avoid confusion in the future.

Question 4

What companies use factoring?

Accepted Answer

Businesses under the following industries usually use invoice factoring to get additional capital:

Trucking
Construction
Freight
Transportation
Business Services
Wholesale
Manufacturing
Technology
Consulting
Distributors
Logistics

Question 5

How is forfaiting advantageous?

Accepted Answer

One of the biggest advantages of forfaiting is that it’s mainly a non-recourse factoring. That means the exporter using the financing won’t be liable in the event that their customers fail to pay the invoices. Since the business owners have forfeited their rights to their accounts receivable ledger, they won’t be responsible for the payment collection, resulting in more cash savings.

Forfaiting is also flexible. The forfaiter can tailor the financing terms so it suits the exporter’s needs and allow them to conduct business internationally.

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Factoring Vs. Forfaiting: What’s the Difference?