The Ultimate Guide to Invoice Factoring for B2B Businesses

If your business sells to other businesses on credit terms, you know the pain of waiting 30, 60, or even 90 days to get paid. Invoice factoring can solve this cash flow challenge.

What is Invoice Factoring?

Invoice factoring is a financial transaction where you sell your accounts receivable (invoices) to a third party (factor) at a discount in exchange for immediate cash.

It's NOT a loan. You're selling an asset—the right to collect payment on invoices.

How It Works

1. ●Deliver goods/services to your customer
2. ●Send invoice to both customer and factor
3. ●Receive advance (80-95% of invoice value) within 24-48 hours
4. ●Factor collects payment from your customer
5. ●Receive remainder minus factoring fee

Types of Factoring

Recourse Factoring

• ●You're responsible if customer doesn't pay
• ●Lower fees: 1-3%
• ●More common

Non-Recourse Factoring

• ●Factor absorbs credit risk
• ●Higher fees: 3-5%
• ●Limited protection (usually only insolvency)

Spot Factoring

• ●Factor individual invoices as needed
• ●More flexibility
• ●Higher per-invoice cost

Contract Factoring

• ●Factor all invoices from certain customers
• ●Lower rates
• ●Volume commitments

Factoring Costs Explained

Factoring fees are typically 1-5% of invoice value per 30 days.

Example:

• ●Invoice: $10,000
• ●Advance rate: 85%
• ●Fee: 2.5% per 30 days
• ●Customer pays in 45 days

Calculation:

• ●Advance received: $8,500
• ●Fee for 45 days: $375 (2.5% + 1.25%)
• ●Reserve returned: $10,000 - $8,500 - $375 = $1,125
• ●Total received: $9,625

Who Should Use Factoring?

Ideal candidates:

• ●B2B businesses with credit terms
• ●Companies with creditworthy customers
• ●Businesses experiencing growth
• ●Those with seasonal fluctuations
• ●Startups with limited credit history

May not be ideal for:

• ●B2C businesses
• ●Companies with margin too thin for fees
• ●Businesses with customer concentration issues

Choosing a Factor

Questions to ask:

1. ●What are your advance rates?
2. ●What's the fee structure?
3. ●Is it recourse or non-recourse?
4. ●Are there volume minimums?
5. ●What's your application process?
6. ●How quickly do you fund?
7. ●Do you do credit checks on my customers?
8. ●What industries do you specialize in?

Factoring vs. Invoice Financing

Conclusion

Invoice factoring can be a powerful tool for managing cash flow in B2B businesses. The key is understanding the costs, choosing the right factor, and ensuring the math works for your margins.