Invoice Factoring FAQ and Glossary

A glossary of basic business finance terms relative to invoice factoring, also known as receivables financing.

Invoice Factoring FAQ: What is Invoice Factoring?

Invoice factoring is a centuries old business finance tool which allows organizations that invoice their customers for payment to receive immediate payment by factoring them with a third party, called a Factor, for a small fee.

Invoice factoring has several synonyms, and is sometimes referred to as:

  • Receivables financing or receivables factoring
  • AR factoring (or A/R factoring)
  • Accounts receivable or account receivables factoring
  • Invoice financing, invoice discounting or invoice factoring

No matter which term is used to refer to the process, invoice factoring is a financial transaction whereby a business factors a customer invoice with a third party – called a Factor or Factoring Company – for a small fee. DB Squared offers invoice factoring services with invoice factoring fees that range from 1-5% and advances ranging from 85-98%.

Invoice Factoring FAQ: Why Factor Invoices?

Why do organizations choose to factor invoices, instead of simply waiting for their customers to pay?

Companies that factor invoices can focus on growing their organization instead of chasing invoices or performing collections; but saving time and money on accounting activities are only one benefit for companies that factor invoices. An organization might also choose to factor invoices when:

  • They want to offer extended terms to their customers as a competitive advantage
  • Immediate access to capital will enable them to take advantage of new business opportunities
  • Faster cash flow will let them take on new business, serve larger accounts or fulfill bigger orders
  • They have slow-paying customers who occasionally take 30 days – or longer – to pay
  • They need to improve cash flow in order to meet operating expenses
  • They want to negotiate discounts for early payment with their own suppliers and vendors

The opportunities lost by an organization during the time they wait for customers to pay is often referred to as “opportunity cost.” Our opportunity cost calculator can help you determine whether factoring invoices could be a useful business finance tool for your organization.

Invoice Factoring FAQ: What is Opportunity Cost?

The longer customer invoices go unpaid, the less working capital is available. Limited access to working capital equates to limited means to take advantage of opportunities to grow.

These missed opportunities are what is referred to as opportunity cost; it is the ‘cost’ an organization pays when they don’t use invoice factoring to unlock the working capital tied up in customer invoices, so they can use it to grow more quickly.

Our factoring opportunity cost calculator – or invoice factoring calculator – shows how much working capital an organization could unlock if they factored invoices, instead of waiting for customers to pay.

You can use our invoice factoring opportunity cost calculator to determine whether freeing up cash flow represented in unpaid customer invoices could help you grow your organization more quickly.

Opportunity Cost Calculator

Use our invoice factoring calculator to determine whether factoring receivables could expedite cash flow in your business.

  • Your Current Total Accounts Receivable
    $1,000 $5,000,000+
    $0
  • Your Average Customer Invoice Amount
    $0 $250,000+
    $0
  • Advance Rate for Factored Invoices (Advances usually range from 85-98%)
    85% 98%
    0%
  • Factoring Fee (Factoring fee usually ranges from 1-5%)
    1% 5%
    0.50%

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  • Expedite working capital tied up in customer invoices, without waiting for customers to pay Working Capital Unlocked $0
  • Average Factoring Fee $0

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Invoice Factoring FAQ: What is an Opportunity Cost Calculator?

Use the sliders to estimate the amount of your outstanding customer invoices, average invoice amount, expected or known invoice factoring rate and desired or current advance rate.

By calculating opportunity cost, you can find out how unlocking the working capital tied up in customer invoices could allow you to expedite cash flow — and put the money to work to grow your business faster.

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Invoice Factoring FAQ: What are Common Invoice Factoring Terms?

Even though invoice factoring is a centuries-old business finance tool, some of the common terms used in the process of factoring invoices might be unfamiliar to those who have not factored receivables before.

Who are the parties involved in the invoice factoring process?

Factor (or factoring company): An organization who purchases B2B accounts receivable at a discount to expedient the cash flow for their client.

Factoring Client (or Client): the Factor’s customer.

Account Debtor (or Debtor): the Client’s customer.

 

Here are some common terms related to the process of factoring invoices itself:

Factoring Advance Rate: The percentage of a submitted invoice paid out to the Client at the time the invoice is factored.

Funding: The process of delivering money to the Client for the purchased invoice.

Factoring Fee (or financing fee or discount rate): The percentage of invoice amount or fee that is retained by the Factor, agreed-upon at the time of documentation for invoice factoring.

Opportunity Cost Calculator (or invoice factoring calculator): A calculator providing results that show how much working capital is tied up in customer invoices as well as the fees related to gaining immediate access to the working capital represented in total accounts receivable.  The term opportunity cost refers to the opportunities a business loses due to slower cash flow while waiting for customers to pay.

Reserve: The difference between the invoice amount and the Advance + Factoring Fee that is held back by the Factor until an invoice has been paid (by the Debtor).

Reserve Release: The delivery of reserve funds paid to the client when an invoice is paid by a Debtor.

 

Recourse vs. Nonrecourse factoring companies

Finally, it is also important to distinguish between two types of factoring companies, those that factor invoices without recourse (also known as non-recourse factors) and those that factor with recourse:

Recourse Factoring (or full recourse factoring or factoring with recourse): Recourse Factors do not assume the credit risk for the invoices they factor, and the client will be required to buy back invoices they have factored which have not been paid in a timely manner by the account debtor, and may also incur related collections fees.

Nonrecourse Factoring (or non-recourse factoring or factoring without recourse): Nonrecourse Factors assume the credit risk for the invoices they factor DB Squared is a non-recourse factoring company, so organizations that factor invoices with us reduce their financial risk from bad debt (or even eliminate it entirely).

We would be happy to answer any questions you have about invoice factoring. Feel free to use our contact form or call us at 866-855-3640 for answers or clarification.

Get more information or request a non-recourse invoice factoring proposal:

We would be happy to provide you with a free, no-obligation proposal for invoice factoring services whether you are new to factoring or you are already working with an invoice factoring company.

Invoice Factoring FAQ: What sets the best factoring companies apart?

We look for reasons to say ‘yes.’

The best factoring companies look for reasons to say yes and take a long-term perspective. They don’t lock factoring clients into contracts with hidden penalties, add-on fees or other unwelcome surprises. The best invoice factoring companies seek to minimize the cost of factoring while maximizing the benefits of factoring receivables for their clients.

The best factoring companies earn their clients business, day in and day out, by offering their clients competitive factoring rates, flexible options and superior customer service.

DB Squared should make your list of the best factoring companies for many reasons.

Experience: Our team has more than 100 years combined experience providing business financing to small and mid-sized businesses, across many different industries.

Reliability: DB Squared is a wholly owned subsidiary of a 30 year old privately-held consumer financing company.

Advance and Financing Rates: Because of our team’s experience and backing, we are able to offer our clients high advance rates and competitive fees.

Flexibility and Customer Care: We want to earn your repeat business and referrals. Our goal is to help you grow your business to the next level. One of the ways we do this is by providing our clients with excellent customer service and offering flexible programs which can be tailored to the unique financial needs of their businesses.