Best Invoice Factoring Companies: How to Compare Them

How factoring works in four steps

You invoice a customer, sell the invoice to a factor, receive most of its value now, and get the remainder, minus fees, when the customer pays.

1. You deliver goods or services and issue an invoice to a business customer.
2. The factor advances a percentage of the invoice, often most of it, within a day or two.
3. Your customer pays the factor according to the invoice terms.
4. The factor releases the held-back portion to you, less its fee.

Factoring is built for business-to-business billing with creditworthy customers on net-30, net-60 or net-90 terms. The factor cares more about who owes the invoice than about your own credit history. It does not fit consumer sales or businesses paid immediately at the point of sale.

More background is in the guide to how invoice factoring works.

The comparison checklist

Compare advance rate, all fees, recourse terms, minimums, contract length and how the factor communicates with your customers.

• Advance rate. The share of the invoice you receive up front. Ask what is held in reserve and when it is released.
• Fee structure. Some factors charge a flat percentage per invoice. Others charge a rate that grows the longer the invoice stays unpaid. Ask for the cost on a 30-, 60- and 90-day invoice.
• Extra fees. Application, due diligence, ACH or wire, monthly minimum and termination fees.
• Recourse. With recourse, you repay if the customer does not. Non-recourse shifts some of that risk, but usually only for credit-related nonpayment, not disputes.
• Contract. Is there a long minimum term, a volume commitment, or an auto-renewal?
• Customer contact. Many factors collect from your customers directly. Make sure you are comfortable with how they do it.
• Whole-ledger or selective. Some require all invoices; others allow single invoices.

What factoring can cost, with an illustration

A factor's fee looks small per invoice but compounds because it applies every billing cycle. Convert it to a monthly or annual view before choosing.

The numbers below are illustrative only. Actual pricing varies by factor, customer credit and volume.

If you factor every invoice and the work earns a 20 percent margin, a fee near 3.5 percent per cycle takes a meaningful share of profit. Factoring pays when speed of cash lets you take work you would otherwise decline.

When factoring is not the right fit

Skip it if you sell to consumers, if customers are slow or disputed, or if your margin is too thin to absorb per-invoice fees.

Factoring can be awkward if customers dislike a third party collecting, or if invoices are often disputed. It is also costly if you need money for something other than receivables, such as equipment or expansion. Contractors with progress billing and retainage can face extra complexity.

If you want cash tied to receivables without selling invoices, other tools exist. A business line of credit gives revolving cash not tied to any one invoice. See the comparison of line of credit and invoice financing.

Closest ROI Funder alternatives

ROI Funder does not offer factoring. A business line of credit or working capital can cover similar cash gaps for firms that meet its minimums.

A business line of credit lets you draw when invoices are unpaid and repay when customers pay, with decisions typically in 24 to 72 hours. Working capital is lump-sum cash for payroll and supplies, often funded the same business day on approved, complete files.

Neither is a substitute for factoring if your customers' credit is your strongest asset and your own profile is weak. ROI Funder considers 500+ FICO, 6+ months in business and $20,000+ in monthly revenue, so a very young business may be better served by a factor. We would rather say so than force a fit.

Questions to ask before signing a factoring agreement

Ask for a written fee schedule, termination terms, and a sample statement showing exactly how an invoice is settled.

• What is the total cost on a 30-, 60- and 90-day invoice, including every fee?
• What happens if a customer pays late or disputes?
• How do I exit, and what does it cost?
• Do you file a lien on all my receivables or only the factored ones?
• Who talks to my customers and what do they see?

Take the answers in writing and compare at least two quotes. Our broader guide to which funding fits your business can help you decide whether factoring belongs in the mix.