The Best Factoring Companies of 2021

A factoring company ‒ also known as invoice factoring or accounts receivable factoring ‒ is a service that purchases your open, unpaid invoices and advances your business money to cover a portion of those invoices. In other words, you "sell" the unpaid invoices your clients or customers owe you for roughly 80 to 100% of the value of the invoice. 

After a factor purchases your receivables, they collect payment from your clients and customers directly. In some cases, a factoring company will operate behind the scenes, requiring you to contact the customer and collect their payment. 

Once your customer pays their invoice, you receive the remaining amount of the invoice from the factoring company, minus their fees. 

The primary reason businesses work with a factoring company is to open up their cash flow. Factoring is a good option if your business typically waits 30 to 60 days (or more) to receive payment from clients.

Factoring can be a good option for improving your business's cash flow, and there are many benefits of working with a factoring service, such as:

1. You get cash immediately. The most obvious benefit of working with a factoring company is that you get cash fast. Traditional payment terms require customers and clients to pay in 30, 60 or even 90 days. If you're waiting for an invoice for 90 days, you may damage relationships with clients, vendors and employees. For construction companies, factoring helps you secure critical materials for your next job. For agencies, having cash in hand helps you meet payroll so your employees are taken care of.
   
   
2. Factoring is both a short- and long-term solution. Factoring can be a great way of funding your operation during the off-season when business is slow, you've hit a rough patch or your business is growing rapidly. It can also be a solution you use year-round to ensure steady cash flow.
   
   
3. It's generally easier than applying for a loan. In many cases, a traditional business loan is still the best way to get an injection of capital, but it takes time and requires a lot of paperwork. Factoring is fairly straightforward, and many companies will put cash in your hand within 48 hours of applying. [Interested in a business loan or other financing option? Check out our best picks and reviews.]
   
   
4. The requirements are straightforward. Generally speaking, you qualify if you operate a business with commercial or government clients (who have good credit), and if your business is free of liens, encumbrances and legal problems.
   
   
5. New and small businesses can use factoring. Without an established credit history, new businesses may struggle to find a traditional lender who will offer them a line of credit. Further, small businesses may not have a strong enough profit margin to attract a lender. Many factoring companies, on the other hand, work with startups and small businesses.
   
   
6. Your line increases with your growth. Factoring scales with your business, which means you get access to more funds as you gain more customers or clients.
   
   
7. Your invoices are collateral. With a traditional business lender, your personal and business assets can be used as collateral. This can include real estate, business equipment, inventory, vehicles and intangible assets. With factoring, the invoices are your collateral, which means you don't have to surrender critical business or personal assets if your business is struggling.

While there are benefits to using a factoring service, it can be a risky choice for a few reasons. The most obvious drawback is that you lose part of what would be a profit to fees. 

Consider these elements as well before working with a factoring service: 

• Factoring rates are typically higher than traditional line of credit rates. Factoring gets cash in your hand quickly and with less paperwork compared to traditional lenders, but the rate is typically higher than that of a traditional loan. Your actual rate could range from 1 to 4% for 30 days.
  
  
• Factoring companies may contact your customers. Most factoring companies communicate directly with your clients, and you do not want to burn bridges with loyal customers because a company represented your business poorly.
  
  
• Factoring doesn't fix your financial problems. Traditional lines of credit can be used to solve any number of financial crunches your business encounters, such as keeping your inventory fully stocked or opening a new storefront. While a factoring service may temporarily improve your cash flow problems, it won't fix fundamental financial problems.

Another risk is with recourse factoring – the most common form of factoring – in which you agree to buy back accounts that your factoring service cannot collect. Generally, you receive around 80% of the total amount; whatever amount the factoring company initially fronts you, you must repay. Recourse factoring can put you in a worse financial position than you were in before you factored. If recourse factoring seems too risky, consider Factor Funding, as it offers nonrecourse factoring.

Before working with a factoring service, research its reputation. If it has a history or pattern of rude or harassing behavior, look elsewhere.

Factoring companies are not collection agencies. The main purpose of factoring companies is to improve your cash flow, not to harass your customers to pay a debt. If your customer is late paying, some factoring services notify your customers in writing, or they may call to ask for payment, but they generally do not drive customers away.

Still, do your due diligence that the company you choose has solid customer service and a helpful follow-up process that won't drive your customers away. [Are you looking for a collection agency? Check out our best picks and reviews of those services.]

If factoring seems too risky, merchant cash advances are another option to consider. They are yet another alternative to a traditional loan.

The number of factoring companies is vast, so it's important to carefully consider your business needs, what services are available to you and which companies have the best offers. 

First, ensure that you are eligible to use the service. Some factoring services work with specific industries, such as trucking, gas or oil. CapitalPlus, for example, specializes in factoring for construction companies. 

Most of the services we evaluated work with startups, and many will not turn you away if you have poor credit or a bankruptcy. Paragon Financial is a nonrecourse factoring company that ignores the personal credit of a business owner and, instead, focuses on the customer's ability to pay. While this is beneficial for businesses with poor credit, your ability to secure money from a factoring service depends on the creditworthiness of your customers. Factoring companies will not purchase invoices if your customers are high risk. 

Choosing the best factoring service for your business also depends on how delinquent your invoices are. Some companies don't accept delinquent accounts or only accept invoices that are up to 45 days delinquent. On average, most companies accept accounts that are overdue between 60 and 90 days. Riviera Finance, on the other hand, has no maximum number of days an invoice can be overdue for the company to buy from you. 

Last, consider the factoring service's approval and funding process. The best services have a quick turnaround time for approval and funding. Many of the services we evaluated will review your application (and notify you of their decision) within 24 hours, and all can transmit funds 24 hours from the time you submit an invoice to be factored. All of the services we've listed are available nationwide, and most work with startups.

After reviewing factoring services across the industry, our top-rated factoring companies are: 

• Best factoring service overall: altLine The Southern Banking Company
• Best factoring service for small businesses: American Receivable
• Best factoring service for fast invoices: BlueVine
• Best factoring service for startups: Fundbox
• Best Factoring Service for Freight and Trucking Companies: RTS Financial 

The best factoring services do not charge startup or termination fees, and the percentage they charge for their services is low. If you do not want to factor all of your invoices, choose a service with no invoice minimum. (We've indicated in our reviews if the factoring service has an invoice minimum or not.) Some factoring companies require up to 24 months of commitment. (We also specify in each review if there is a commitment requirement.) The best companies don't require you to commit to the factoring service for a period of time, so you are under no obligation to sell your accounts in the future.

Generally speaking, any B2B (business-to-business) company that invoices their customers for goods and services provided giving 30- to 60-day terms can work with a factoring company. Common industries and businesses factoring companies work with include: 

• Truck companies
• Freight brokers
• Manufacturing companies
• Wholesale companies
• Business and consulting services
• Medical offices 

Alternatively, many factoring companies and financial entities won't work together, so if you already have a business loan, you might not be able to factor invoices. A factor secures its rights to your invoices via a lien to grant them first rights on the asset. However, most banks and financial companies file a lien that covers all of your company's assets, including your accounts receivable. A factoring company won't work with you if another financial entity already has first rights on your accounts receivable. 

In some cases, your bank may subordinate their position for your receivables so a factoring company can claim first rights, but the chances are slim. Accounts receivable is a valuable asset to use as collateral, and most financial entities won't let go of this asset lightly.

How much do freight factoring companies charge?

Freight factoring companies, also known as trucking factoring companies, operate similarly to other factoring companies, and you can expect similar rates and fees. Rates vary by company, but they usually start between 1% and 5%, and many freight factoring companies charge a lower rate for invoices that are paid quickly. 

Can you work with more than one factoring company?

No. You can only work with one factoring company at a time because it is otherwise too difficult to determine who has the first right to your company's outstanding invoices. To establish the first right on your receivables, factoring companies file a UCC lien so they can start collecting your invoices. 

Can I switch factoring companies?

Yes. If you switch to a different factoring company but still have outstanding receivables, you must arrange a buyout in which the new factor purchases the remaining invoices. Additionally, the UCC liens must be changed so the new factoring company establishes first right. Switching factoring companies can be an expensive process, especially if you signed a long-term contract with the original company. 

What is invoice financing versus factoring?

Many people use the terms "invoice financing" and "invoice factoring" interchangeably, but they operate very differently. A factoring company purchases the right to the value of your accounts receivable, whereas with an invoice financing company, you borrow against the value of your accounts receivable but still own your invoices. 

What is recourse versus nonrecourse factoring?

The main difference between recourse and nonrecourse factoring is who is responsible if your customer doesn't pay their invoice. With recourse factoring, you are responsible for your customers' unpaid invoices, though your rates will be lower for the added risk. If you work with a recourse factoring company, make sure your clients have a good credit history. 

On the other hand, with nonrecourse factoring, you are not responsible for late or unpaid invoices. Rather, the factoring company accepts the risk, though nonrecourse factoring is more expensive than recourse factoring. 

Are factoring companies regulated?

In the United States, invoice factoring companies are not regulated by a formal government body. However, many factors are members of associations that self-regulate their practice, such as the International Factoring Association or the Secured Finance Network (formerly known as the Commercial Finance Association).

How is invoice factoring different from a bank loan?

When using invoice factoring, you're selling your unpaid invoices to a factoring company, which is different from requesting a bank loan from a financial institution. Bank loans require you to pay back principal and interest over a certain time period, and your funding potential is limited. Approval is determined by your company's credit history, unlike invoice factoring, which is based on the credit strength of your clients. 

How can factoring help a company manage its cash flow?

Factoring has many advantages for small businesses, and a big one is helping manage cash flow. With factoring, you get paid as soon as you turn the invoice over to the factor – which can be as soon as you provide the service or ship the product. You won't have to wait days, weeks or months to add cash to your bank account.

Since factoring is a sale of your invoices, you aren't taking on new debt that may or may not have a high interest rate associated with it. You also aren't stuck worrying when customers will make their payments since the factor can have the money to you quickly, which improves your ability to manage cash flow.

With more certainty about accounts receivable, you can better plan and take advantage of  growth opportunities that arise.

Factoring also eliminates the need to conduct collections internally. That frees you up to run the business and protects your relationship with customers – you won't be the one chasing down payments; the factoring company does it for you.   

What services do factoring companies provide? 

Factoring companies offer several services around collecting past due payments for business customers. Here are four of the most common services they provide:

• Recourse factoring. If the factoring company can't collect payment on the invoices, the business owner must pay back any money advanced. This may be riskier for the small business, but the service typically has lower fees.

• Nonrecourse factoring. If the customer doesn't pay the invoice, the factoring company is on the hook. That means less risk to you and your business, but it does mean higher fees.

• Spot factoring. This service is for businesses that only need to factor a single invoice. Typically, it's for large invoices you're having trouble collecting or don't want to wait months to get paid for.

• Whole ledger factoring. With this service, you factor all your invoices, which tends to be cheaper than spot financing. The risk with this type of factoring is that you could face a hefty fee if you terminate your contract before it expires.

How do you terminate a factoring contract?

Like other contracts, you can terminate a factoring contract at the end of the specified term and before the renewal period ends. Every factoring company that we evaluated requires clients to give notice before the renewal date; the time periods vary, however, it can be anywhere from 30 to 90 days. Check the contract to verify how early you need to submit notice.

If you want to cancel before the term ends, there are fees involved. Early cancellation fees vary; again, you will need to check the contract.

How can factoring help your business get through a rough patch?

If your business experiences financial difficulties, factoring invoices can give you access to cash flow – you won't have to wait for your customers to pay you. That could mean the difference between keeping the lights on or shutting down operations.

Many factoring companies offer collection services, which can be helpful if unpaid invoices are impacting your cash flow.  While the factoring service is following up on unpaid invoices, you can focus on bringing in new business.

Factoring may cost you more money than a bank loan, but the requirements are less stringent, which means that even if your business credit score or personal credit score isn't stellar, you may still qualify for factoring.

What are the advantages of factoring?

You get several main benefits from partnering with a factoring service: 

• It saves you time. Time is money, and when you're spending it chasing customer invoices, it means less time to grow your operations. When you use a factoring company, you get some of that time back. Its staff will be the ones doing the legwork to recover the money, not you.
  
  
• You get instant access to cash. Since the factoring company takes over your accounts receivable, you get quicker – sometimes instant – access to cash. You won't spend months waiting to collect money from customers.
  
  
• It doesn't require collateral. Bank loans require you to put up business or personal collateral. That's not the case with factoring, since the company is paying you a discount for your accounts receivable.

What are typical costs for factoring?

Factoring companies charge either a variable or fixed rate, depending on your industry. With variable fees, the factoring company typically charges 1% to 3% of the invoice for as long as it goes unpaid. This charge is known as the discounting rate. If the customer pays quickly, the fees are lower. If it takes longer to collect, expect to pay more. For example, a factoring company could charge 1.15% in the first month and then 0.5% every 15 days the invoice isn't paid.

With a fixed-rate plan, which is common in the trucking industry, the factoring company's rate stays the same, whether it takes 10 or 60 days to collect.

What do you need to start with invoice factoring?

We recommend that you gather your company information and accounts receivable documents before starting the application process. The information you need to provide varies from one factoring company to the next, but it typically includes your business and personal phone numbers, email address, and details about your business such as your monthly invoicing volume and the sector you operate in.

Most factoring companies also request an accounts receivable aging report that lists your unpaid invoices, a copy of your articles of incorporation, your business bank account information, and your tax ID number. Factors for certain industries may have specific guidelines and additional requirements that you must meet before being approved for invoice factoring.

What is the goal of factoring?

Invoice factoring takes unpaid invoices and turns them into cash so businesses can fund their short-term capital needs. Invoice factoring provides business owners with access to the cash from invoices quickly, helping them bridge the gap as they await payments, which improves their cash flow.

What is a factoring agreement?

A factoring agreement is the financial contract that spells out all the costs of factoring, including upfront expenses, maintenance and termination fees. It also explains the consequences if the business can't repay the factoring company. A factoring agreement ensures both parties understand their obligations. Factoring agreements are legally binding for both the factoring company and your business.

When should you use factoring?

Invoice factoring costs money, which means you'll earn less profit on the invoices you turn over to the factoring company. It's not right for every business, and it's a decision that shouldn't be made lightly.

Invoice factoring is best if your customers are businesses rather than individuals. Business clients usually pay 30, 60 or 90 days out, and invoice factoring can give you access to cash while you await payment. These are some other scenarios where it may make sense to use invoice factoring:

• You don't have the credit to get a loan or use a credit card.
• You have gaps in cash flow due to the seasonality of your business.
• Your business is growing quickly and you need more cash to sustain that growth.

What types of companies and industries can take advantage of factoring for small businesses?

Factoring works best for companies that have outstanding invoices and/or customers who don't pay their bills on the spot. When shopping for a factoring company, be mindful of the industry each factor serves; some only work with specific industries. Some common industry specialties for factoring companies are trucking and freight, manufacturing, wholesale, business consulting, and medical offices.

Your ability to use factoring also depends on the creditworthiness of the customers you serve. It is uncommon for factoring companies to purchase invoices if the customer is a high risk for nonpayment. Some companies also stay away from businesses that have delinquent accounts, while others will only accept accounts that are up to 45 days past due. The industry average is 60 and 90 days past due.

How does factoring differ from a business loan?

With factoring, you sell your customers' unpaid invoices to a lender (the factoring company) at a discount in exchange for a lump sum of cash. The factoring company oversees the collection process; it gets paid when it collects the money from your customers, usually in 30 to 90 days. With a business loan, you borrow money at a fixed or variable rate for a predetermined amount of time, with payments due weekly, biweekly or monthly.

When considering factoring services, we looked at two elements: features and eligibility. For features, we considered the rates and fees the factoring services charge and their processes (application, approval and funding). With eligibility requirements, we researched the number of days an invoice can be overdue and the maximum amount a company will factor monthly. We also checked whether the service offered nonrecourse factoring and what types of commitments they require of clients. 

We scoured websites and contacted dozens of factoring services to get answers to our questions and also to gauge their level of customer support. While some companies weren't as responsive, most of the companies we reached out to quickly responded, supplying the requested information. Overall, representatives from the services we evaluated were knowledgeable and very helpful.

All of the services we've reviewed are good, reputable companies. However, the best factoring company for your business depends on your needs. Consider the rates and fees of each company, but remember that they're all in the same range.

Above all, make sure that factoring is the right step for your company. We recommend a company that offers nonrecourse factoring, such as Riviera Finance. Additionally, weigh how much you need to factor each month and how long you need to factor, as each company varies in what it will accept. American Receivable factors invoices that are 120 days past due while Riviera Finance will factor invoices regardless of how overdue they are. Charter Capital, by contrast, doesn't accept delinquent accounts.

Finally, consider the support that each company provides. They will, after all, be working with your customers – you want your customers to have a positive experience. Our best customer service experiences were with Riviera Finance and American Receivable. All of the services we've reviewed are solid choices; it boils down to what's best for you.