First, Let’s Start With How Factoring Works.

Factoring 101

Invoice factoring is a service where a finance company will buy your outstanding invoices and advance you 80-90% of the total via ACH wire transfer. The rest is held in reserve until your customers pay their invoices, and then returned minus a variety of factoring fees. We’ll get into the specific fees later.

The “advance rate” you get as well as the fees are variable and depend on a variety of factors. They can also be confusing if you are not well versed in the field. That’s why we made this guide, to help arm you with knowledge and decode the industry jargon.

Why would anyone choose factoring as an option?

A fair question, given that we are making a whole guide on understanding the pricing. Factoring – also known as payroll funding, invoice factoring, AR funding, etc – is actually an attractive option for many staffing firms given the cash flow negative nature of the business. While your customers may take 30-60 days or longer to pay their invoices, you have to pay your temporary workers weekly or biweekly. This can cause issues when you are in growth mode trying to take on more contracts, and therefore more employees. Factoring your invoices allows room for business growth.

Why not just get a bank loan?

While bank loan rates may seem more attractive on the surface, there are several reasons staffing firms might choose to go the factoring route instead.

  • It can be difficult for staffing firms to secure bank loans. Banks require collateral like property and equipment on loans, and often staffing firms have little. Factoring companies do not have the same stringent requirements.
  • A bank loan is finite. Once you hit your facility limit, you are out of luck. And it can be complicated, lengthy and sometimes costly process to increase your limit, which doesn’t help if you have a new contract waiting. Factoring grows with you.
  • Banks charge many fees. While a fixed APR might seem more straightforward, banks are notorious for charging fees that can add up to thousands. Collateral fees, application fees, documentation fees, monitoring fees, monthly fees, facility fees. Factoring companies often do not charge these types of fees.
  • Banks do not act as a business partner for collections and/or mitigating credit risk where factoring companies often do.