Each year, tens of thousands of small businesses across the country apply for invoice factoring, according to the latest Fed Small Business Credit Survey. While the transition to factoring is typically seamless, it works differently than most funding solutions business leaders are accustomed to. Below, we’ll explore what sets it apart and how to ensure you get off to a smooth start.
Why Businesses Transition to Factoring
It’s often said that cash flow is the lifeblood of all businesses. However, making sure you have enough money coming in to cover the expenses that are leaving your account at any given time is a bit of a balancing act with lots of potential disruptions. For instance, if your cash inflows stop or become sluggish due to slow-paying customers or a seasonal lull, it becomes difficult to cover everyday expenses. Equally, if your outflows increase, even temporarily, due to business growth or unexpected expenses, your standard inflows may not be enough to cover them.
Larger companies have access to more financial tools, solutions, and reserves, so it’s easier for them to weather these challenges. Smaller businesses often lack in these areas and have been traditionally underserved by the banking industry. This creates a need for unique funding and cash flow solutions, like invoice factoring.
Factoring Works Differently Than Traditional Financing Solutions
Instead of getting a lump sum that you have to pay back over time with interest, like you would with a traditional business loan, invoice factoring unlocks the cash trapped in your unpaid invoices. This is money you’ve already earned, but might not receive for weeks or months, depending on the payment terms you set with your clients.
In short, you’re selling your invoices at a slight discount to a factoring company, also called a factor, like Charter Capital. You receive most of the value of the invoice upfront, and the factor takes over the collections process, freeing you from chasing invoices. When your customer pays the factor, you receive the remaining sum, minus a small factoring fee.
Factoring vs. Accounts Receivable Financing
Factoring is often considered a subset of accounts receivable financing or even confused with it. However, it’s important to note that these are two very distinct funding solutions. With financing, the invoices serve as collateral on a loan that you’re taking out with interest and fees that you have to pay back. You still handle the collections process and then make payments to the lender. With factoring, you’re selling the invoice, and there’s nothing to pay back. You also get the added benefit of back-office collections support.
You Free Up Working Capital without Debt
You can use the cash in whatever way suits your business best, whether that means meeting payroll obligations, purchasing equipment and supplies, or investing in your business in another way. Because factoring is not a loan and your customer clears the balance when they pay the invoice, there’s no debt or interest for you to repay. This leads to factoring benefits like:
- Stronger Balance Sheets: Factoring doesn’t show up as a liability on your balance sheet, which can improve your debt-to-equity ratio and make your business more attractive to lenders or investors.
- Preserved Credit Capacity: Since factoring doesn’t involve borrowing, it doesn’t impact your existing lines of credit or make it harder to qualify for loans in the future. Because of this, many businesses don’t “transition to factoring.” They use it alongside other funding sources as needed.
- Potential Discounts: Oftentimes, vendors offer early payment discounts or bulk discounts. Factoring can enable you to take advantage of these options, ultimately saving your business money.
- No Monthly Repayments: You’re not adding a new bill to your monthly obligations when you leverage factoring. This makes it easier to focus on the future and plan.
Cash Flow Management is Easier with Factoring
A mere 42 percent of B2B payments arrive on time, according to Atradius. Not surprisingly, this also means most small businesses experience financial challenges due to payment delays. Factoring helps you take control.
- Predictable Access to Capital: With factoring, you know exactly when funds will come in, which allows you to manage your payables without second-guessing yourself.
- Eliminated Waiting Periods: Instead of building a cash flow plan around invoice aging, you can get paid within days and focus on the future.
- Less Stress Around Collections: Most factoring companies take care of collections for you and do so in a customer-centric way. This gives you hours back each week and the freedom to focus on growing your business.
Getting Approved is Fast and Easy
Generally speaking, denial rates for business funding are staggering. Only about half of the businesses that apply for funding receive the full amount, according to the Small Business Credit Survey. Looking specifically at business loans, the figure is less than 40 percent. And even though SBA loans and lines of credit are typically thought of as more accessible, less than one-third of businesses that apply receive full funding. Factoring is different.
All of these traditional solutions rely on the same rigid criteria, such as your business credit score, personal credit, time in business, debt ratios, and more. Meanwhile, factoring companies are more concerned about the likelihood of your customer paying on time. In other words, if your customers are established and creditworthy, you’re likely to be approved for factoring. This is true even if your business is newer or credit-challenged.
Additionally, funding is directly tied to the value of your invoices. This also means your access to funding automatically scales with your business.
For instance, at Charter Capital, you can receive your factoring quote and terms the same day you apply. There’s no minimum credit score to qualify, and you can even get funding on your invoices the same day you submit them.
7 Simple Tips for a Smooth Transition to Factoring
Getting started with factoring is a seamless process when you’re working with a top invoice factoring company. You’ll likely go through an onboarding process, and they’ll walk you through each step. However, following the tips outlined below can help ensure you’re prepared and make your transition to factoring even smoother.
1. Ensure Business Factoring is a Fit for Your Needs
Factoring is a bit like the Swiss army knife of the funding world, so it works in a lot of situations. However, it’s still important to compare the fit before you proceed. If the situations below apply to your business, it’s worth exploring.
- You Need Working Capital Quickly: Advances typically arrive in 24 to 48 hours, though some companies like Charter Capital offer same-day payments.
- You Invoice Other Businesses: Most factoring companies only fund B2B invoices. If your clients are consumers, you’ll likely need to find another solution.
- You Experience Long Payment Cycles: If slow-paying customers are holding back your growth or making it hard to meet expenses, factoring can help level out your cash flow.
- You Don’t Want Debt: Factoring does not add debt to your balance sheet, so it’s ideal for those trying to minimize their debt. However, sometimes, debt can be good, especially if you’re trying to establish your credit. If this is something you’re working on, factoring can make it easier for you to manage your payables, which indirectly supports strong credit.
2. Assess Your Business’s Readiness for Factoring
Once you set the wheels in motion with an application, things can move fast. It’s helpful to ensure your business is ready to go when you submit an application.
- No Conflicting Liens on Receivables: If another entity, such as a lender or the IRS, has already placed a lien on your invoices, the factoring company cannot fund you until it’s resolved.
- Invoices Are Clear and Current: Avoid invoices with disputes, vague terms, or outdated charges. Factoring companies typically only work with invoices that are free of issues and newer.
- Your Clients Are Creditworthy: Since funding is based on your customers’ ability to pay, factoring companies will look closely at your client base.
- Your Invoicing Process is Reliable: You should have a system in place for issuing timely, professional invoices that clearly outline payment terms.
- You Have Access to Essential Documents: The factoring company will want to see proof that your business is operating legally and will ask to see common financial documents.
3. Know What You Need from Your Factoring Agreement
When you’re applying for a loan, there are very few “levers” you can pull to adjust your terms. For instance, you might opt for a 20-year loan instead of a 30-year loan to reduce the cost of borrowing. With factoring, it’s a little more nuanced than this, so it’s helpful to understand the different options available to ensure your agreement matches your needs.
- Recourse vs. Non-Recourse: In a recourse agreement, you are responsible if your client fails to pay. In a non-recourse agreement, the factoring company absorbs the loss under certain conditions. The latter typically costs a little more because of this protection. Because of this, and the fact that clients are typically vetted before an invoice is accepted, most businesses opt for recourse factoring.
- Spot Factoring vs. Contractual Factoring: Spot factoring lets you fund individual invoices as needed. Contractual agreements typically involve a longer-term commitment and volume minimums. Both options have benefits. Spot factoring tends to give businesses more flexibility and control over costs, while contractual options often come with discounts.
- Term Lengths and Cancellation Terms: Some agreements auto-renew or have cancellation fees. Charter Capital does not require long-term contracts, and you stay in control of which invoices you factor, so these issues are not a concern. However, you should be aware that they can be part of some agreements and decide in advance if they’re something you’re willing to accept.
- Advance Rates and Fees: Advances are typically between 60 and 90 percent of the invoice’s value. The ceiling is often determined by your industry, risk level, and other factors. However, you can sometimes receive greater or lesser amounts, which can impact your overall costs.
4. Prepare Your Financial Documents and Be Ready for Factoring Setup
Although we touched on this earlier in terms of factoring-readiness, it’s worth covering separately. A few things you’ll want to have ready when you apply are outlined below.
- Proof of Business Formation and Identity: This usually includes your Articles of Incorporation, a driver’s license, and a voided business check.
- Accounts Receivable Aging Report: This gives the accounting company a snapshot of your unpaid invoices and payment patterns.
- Customer Contact Information and Contracts: Factoring companies may need to verify the legitimacy of invoices or reach out to clients. Most will be familiar with factoring, so the process is a breeze.
- Bank Statements and Tax ID Numbers: These are often requested during underwriting to help verify business legitimacy and set up your funding account.
5. Select the Right Factoring Company
Businesses often focus on rates when choosing a factoring company. However, some of the best factoring companies charge a little more upfront, but remain competitive, offer better service, and don’t nickel and dime you. Keep the following areas in mind as you compare factoring companies.
- Industry Specialization: A factor that understands your business model, challenges, and customers is better poised to support your needs. Factoring companies that specialize in specific industries may also offer unique perks that can help your business grow. For instance, at Charter Capital, we can help most B2B businesses, but also offer specialized factoring for trucking and freight services, security firms, staffing companies, consulting and service firms, manufacturing, and oil and gas services.
- Service and Support: Look for responsive customer service and account managers who can walk you through funding, answer questions, and support your clients if needed.
- Clear, Transparent Pricing: Rates should be easy to understand. Ask for a breakdown or to see how one of your invoices would be handled.
- Fast, Reliable Payments: Ask how quickly you’ll be paid after submitting an invoice and clarify when the reserve will be released.
6. Communicate with Your Team and Clients
Factoring impacts how payments are processed, so your internal team and external clients should be kept in the loop.
- Notify Your Billing or Accounts Receivable (AR) Staff: Make sure your team understands the new process, including where to send invoices and how payments are tracked.
- Update Clients Professionally: Clients are notified about the shift and where to send payments during setup, but it helps to give key clients a proactive heads-up.
7. Fold Factoring into Your Business Operations
Once your factoring setup is complete, integrate it into your workflows so it becomes a seamless part of your financial operations.
- Designate an Internal Point Person: Try to have a single person responsible for managing the factoring relationship to prevent confusion and keep communication efficient.
- Track Funded Invoices and Reserves: Stay on top of which invoices have been funded, when the reserve will be released, and how fees are deducted.
- Monitor Cash Flow with New Timing in Mind: With faster payments coming in, you may be able to accelerate vendor payments, payroll runs, or growth investments, but it helps to build a new cash flow rhythm.
- Keep Records Organized: Maintain clear documentation for audits, renewals, and client questions. Most factoring companies provide portals or reports to help with this.
Streamline Your Transition to Factoring with Charter Capital
At Charter Capital, our motto is “Factoring Made Simple.” There are no application or sign-up fees. Approvals and clear terms are provided on the day you apply. And, our decades of experience mean you’ll benefit from a smooth process with free collections services, competitive rates, and no long-term contracts. To learn more or begin the transition to factoring, request a free rate quote.
- 7 Simple Tips for a Smooth Transition to Factoring - August 18, 2025
- How to Tackle Top Financial Challenges for Small Businesses - July 21, 2025
- Top Strategies for Maximizing Profitability - June 23, 2025
