factoring business plan

Factoring Company Business Plan [Sample Template]

By: Author Joy Nwokoro

Home » Business ideas » Financial Service Industry » Factoring Business

A factoring business is a type of financial service provider that purchases the accounts receivable of a company and provides the company with immediate cash. Accounts receivable are the amounts owed to a company by its customers for goods or services that have been delivered but not yet paid for.

The factoring company buys these invoices at a discount, usually around 70-90% of their face value, and then takes on the responsibility of collecting payment from the customers.

This allows the company to receive cash quickly and without having to wait for their customers to pay. Factoring businesses can be particularly useful for companies that have cash flow problems or that need to quickly raise funds for expansion or other business needs.

Steps to Write a Factoring Company Business Plan

1. executive summary.

Sherly Bentley© Factoring Company, Inc. is a factoring company that is based in Brooklyn, New York, and provides financial services to small and medium-sized businesses. We specialize in purchasing accounts receivable from companies and providing them with immediate cash to support their working capital needs.

Our team is made up of experienced financial professionals who are committed to providing our clients with excellent service and support. We work closely with each client to understand their unique needs and tailor our services to meet those needs.

Our factoring services are designed to be flexible and affordable, with competitive rates and fees. We offer fast approval times and quick funding to ensure that our clients have access to the cash they need as soon as possible.

We believe that our company is well-positioned to succeed in the factoring industry. We have a strong track record of providing excellent service to our clients, and we are committed to continuing to innovate and improve our services in order to meet the changing needs of businesses.

2. Company Profile

A. our products and services.

Sherly Bentley© Factoring Company, Inc. will be involved in;

Accounts Receivable Factoring
Invoice Financing
Credit Analysis
Collections
Accounts Receivable Management (including issuing invoices, tracking payments, and reconciling accounts).
Purchase Order Financing
Bad Debt Protection.

b. Nature of the Business

Our factoring company will operate with a business-to-business model.

c. The Industry

Sherly Bentley© Factoring Company, Inc. will operate in the factoring services industry.

d. Mission Statement

Our mission is to help businesses succeed by providing them with the financial resources they need to grow and thrive. We believe that access to cash is essential for businesses to meet their day-to-day expenses, fund expansion plans, and take advantage of new opportunities.

e. Vision Statement

“At Sherly Bentley© Factoring Company, Inc., our vision is to become the premier factoring company for small and medium-sized businesses. We aspire to be the partner of choice for businesses that need flexible and affordable financing solutions to support their growth and success.”

f. Our Tagline (Slogan)

Sherly Bentley© Factoring Company, Inc. – The Factoring Company You Can Trust!

g. Legal Structure of the Business (LLC, C Corp, S Corp, LLP)

Sherly Bentley© Factoring Company, Inc. will be formed as a Limited Liability Company (LLC). The reason why we are forming an LLC is to protect our personal assets by limiting the liability to the resources of the business itself. The LLC will protect our CEO’s personal assets from claims against the business, including lawsuits.

h. Our Organizational Structure

Chief Operating Officer (Owner)
Admin and HR Manager
Marketing and Sales Executive (Business Developer)
Customer Services Executive/Front Desk Officer

i. Ownership/Shareholder Structure and Board Members

Sherly Bently (Owner and Chairman/Chief Executive Officer) 52 Percent Shares
Ken Jacobs (Board Member) 18 Percent Shares
Andrew White (Board Member) 10 Percent Shares
Bob Russel (Board Member) 10 Percent Shares
Caroline Martins (Board Member and Secretary) 10 Percent Shares.

3. SWOT Analysis

A. strength.

Strong track record of providing excellent service to clients.
Experienced and knowledgeable team of financial professionals.
A comprehensive suite of financial services, including factoring, credit analysis, collections, and accounts receivable management.
Competitive rates and fees.
Fast approval times and quick funding.
Ability to tailor services to meet clients’ unique needs.

b. Weakness

C. opportunities.

Expansion into new regions and markets to increase revenue.
Offering other financial services such as equipment leasing and invoice financing.
Investing in new technology to improve efficiency and reduce costs.
Building partnerships with banks and other financial institutions to increase access to funding.

i. How Big is the Industry?

It is difficult to determine the exact size of the factoring industry in the United States, as no central registry or regulatory body tracks industry-wide data.

However, according to a report by the Commercial Finance Association, the factoring industry provided $120 billion in financing to businesses in the United States in 2020. This includes both domestic and international factoring, as well as other types of asset-based lending.

ii. Is the Industry Growing or Declining?

The factoring industry in the United States has been growing steadily in recent years. According to a report by the Commercial Finance Association, the factoring industry provided $120 billion in financing to businesses in the United States in 2020, which is an increase from the $117 billion provided in 2019.

This growth can be attributed to several factors, including increased demand for working capital among small and medium-sized businesses, the growing popularity of alternative financing options, and the relatively low cost of factoring compared to other types of financing.

Additionally, technological advancements have made factoring more accessible and efficient, which has helped to attract new participants to the industry.

However, like many industries, the factoring industry may face challenges in the future due to economic conditions or regulatory changes. Nonetheless, overall, the factoring industry appears to be growing and evolving to meet the needs of businesses.

iii. What are the Future Trends in the Industry?

The factoring industry is expected to continue growing in the future due to increased demand for working capital among small and medium-sized businesses, the popularity of alternative financing options, and advancements in technology.

Some of the future trends in the industry include the use of automation and artificial intelligence to streamline processes, the development of new factoring products and services, and the expansion of factoring into new industries and regions.

However, the industry may also face challenges such as regulatory changes and economic conditions that could impact growth.

iv. Are There Existing Niches in the Industry?

Yes, there are several niches within the factoring industry that cater to specific types of businesses or industries. Some of these niches include:

Invoice factoring for small businesses
Freight factoring
Medical factoring
Government contract factoring
International factoring.

v. Can You Sell a Franchise of your Business in the Future?

Sherly Bentley© Factoring Company, Inc. has plans to sell franchises in the nearest future and we will target major cities with thriving factoring services markets in the United States of America.

i. Who are the Major Competitors?

Triumph Business Capital
TBS Factoring Service
Riviera Finance
Charter Capital
Paragon Financial Group
Republic Business Credit
Prestige Capital
AltLine by The Southern Bank
American Receivable Corporation
DSA Factors
Interstate Capital
Fleet One Factoring
Accutrac Capital
New Century Financial
CapitalPlus Construction Services
Interstate Invoice Factoring
Eagle Business Credit
Factor Funding Co.
Universal Funding Corporation.

ii. Is There a Franchise for Factoring Business?

Factoring is not typically offered as a franchise. Factoring companies are typically independent businesses that operate under their own brand and business model. However, there may be opportunities to become a broker or agent for a factoring company, which would involve referring clients to the factoring company in exchange for a commission.

iii. Are There Policies, Regulations, or Zoning Laws Affecting Factoring Business?

There are currently no federal policies or regulations that specifically govern the factoring industry in the United States. However, factoring companies may be subject to certain state-level regulations, such as those related to lending, debt collection, or consumer protection.

For example, some states require factoring companies to obtain a license or registration in order to operate. In contrast, others impose restrictions on the fees that factoring companies can charge or require them to disclose certain information to clients.

Additionally, factoring companies that collect debts from consumers may be subject to federal regulations, such as the Fair Debt Collection Practices Act.

In terms of zoning laws, factoring companies are typically considered office-based businesses and are subject to the same zoning laws as other businesses in their area. However, some municipalities may have specific regulations or restrictions on the types of businesses that can operate in certain zones or areas.

4. Marketing Plan

A. who is your target audience, i. age range.

Our target market comprises adults above 18 years old who own businesses and who have the finance to do business with us.

ii. Level of Educational

We don’t have any restriction on the level of education of those who we are ready to do business with.

iii. Income Level

There is no cap on the income level of those who we are ready to do business with.

iv. Ethnicity

There is no restriction when it comes to the ethnicity of the people we are looking forward to working with.

v. Language

There is no restriction when it comes to the language spoken by the people we are looking forward to working with.

vi. Geographical Location

Anybody from any geographical location will be welcome to do business with our company.

vii. Lifestyle

Sherly Bentley© Factoring Company, Inc. will not restrict any client from doing business with us based on their lifestyle, culture, or race.

b. Advertising and Promotion Strategies

Search engine optimization (SEO)
Pay-per-click (PPC) advertising
Content marketing
Email marketing
Referral marketing
Events and sponsorships.

i. Traditional Marketing Strategies

Marketing through Direct Mail.
Print Media Marketing – Newspapers & Magazines.
Broadcast Marketing -Television & Radio Channels.
OOH, Marketing – Public Transit like Buses and Trains, Billboards, Street shows, and Cabs.
Leverage direct sales, direct mail (postcards, brochures, letters, fliers), tradeshows, print advertising (magazines, newspapers, coupon books, billboards), referral (also known as word-of-mouth marketing), radio, and television.

ii. Digital Marketing Strategies

Social Media Marketing Platforms.
Influencer Marketing.
Email Marketing.
Content Marketing.
Search Engine Optimization (SEO) Marketing.
Affiliate Marketing
Mobile Marketing.

iii. Social Media Marketing Plan

Start using chatbots.
Create a personalized experience for our customers.
Create an efficient content marketing strategy.
Create a community for our target market and potential target market.
Gear up our profiles with a diverse content strategy.
Use brand advocates.
Create profiles on relevant social media channels.
Run cross-channel campaigns.

c. Pricing Strategy

The pricing strategy for Sherly Bentley© Factoring Company, Inc. typically involves calculating a fee based on the amount of the invoice and the creditworthiness of the customer. Here is our pricing strategy:

Determine the factoring fee: This is typically a percentage of the invoice amount, ranging from 1% to 5%.
Calculate the advance rate: The advance rate can range from 70% to 90% of the invoice amount, depending on the creditworthiness of the customer and other factors.
Determine any additional fees
Consider volume discounts
Communicate the pricing structure clearly
Monitor and adjust pricing as needed.

5. Sales and Distribution Plan

A. sales channels.

Our sales channels will include both direct and indirect channels.

Direct sales: This involves the factoring company’s sales team directly reaching out to potential clients, such as small and medium-sized businesses, through email, phone, or in-person meetings.
Referral sales: This involves leveraging existing clients, business partners, and other industry contacts to refer potential clients to the factoring company.
Online sales: This involves using digital channels such as the company’s website, social media, and online advertising to generate leads and attract potential clients.
Broker or agent channels: This involves working with brokers or agents who act as intermediaries between the factoring company and potential clients, referring clients to the company in exchange for a commission.
Partner channels: This involves working with strategic partners, such as banks, accounting firms, and other financial services providers, to offer factoring services to their clients.
Industry-specific sales channels: This involves targeting specific industries that may have a higher demand for factoring services, such as construction, manufacturing, or transportation.
Trade shows and events: This involves participating in industry trade shows and events to generate leads and build relationships with potential clients.

b. Inventory Strategy

A factoring company will determine the risk associated with providing factoring services to a client and the appropriate pricing and advance rates. However, it is important to note that a factoring company’s primary focus is on the creditworthiness of the client and their ability to repay the factoring advance, rather than the value or liquidity of their inventory.

c. Payment Options for Customers

Here are the payment options that Sherly Bentley© Factoring Company, Inc. will make available to her clients;

Apple Pay and Google Wallet
Credit and debit cards

d. Return Policy, Incentives, and Guarantees

As a financial services provider, a factoring company may not offer a traditional return policy, incentives, or guarantees. However, here are some ways we will offer similar policies or incentives to our clients:

Advance rate guarantees
Performance incentives
Collections guarantees
Non-recourse factoring
Customer service guarantees.

e. Customer Support Strategy

Providing exceptional customer support is crucial for the success of our factoring company. Here are some customer support strategies that we will adopt:

Provide multiple communication channels
Streamline the onboarding process
Offer personalized attention
Set clear expectations.
Provide timely funding.
Maintain transparency.
Offer value-added services.

6. Operational Plan

Our operational plan will cover areas such as client onboarding, credit analysis, funding processes, collections, and risk management. Sherly Bentley© Factoring Company, Inc. will focus on providing exceptional customer support, offering value-added services, maintaining transparency, and setting clear expectations.

a. What Happens During a Typical Day at a Factoring Business?

The business is open for the day’s work
Provide ongoing customer support to its clients, addressing any questions or concerns
Conduct a credit analysis to determine the level of risk associated with each client
Reviewing credit limits, monitoring payment trends, and adjusting funding levels as necessary
Marketing/website upkeep
Administrative duties (documentation, paperwork, and follow-up calls)
The business is closed for the day.

b. Production Process

There is no production process when it comes to factoring business.

c. Service Procedure

Here are the general steps of the service procedure of a factoring business:

Client Onboarding: The first step is to onboard new clients. The factoring business will collect necessary information from the client to determine their creditworthiness.

Credit Analysis: The factoring business will then conduct a credit analysis to determine the level of risk associated with each client. This process involves reviewing the client’s credit history, payment records, and other relevant financial information.
Funding: Once a client has been approved, the factoring business will provide funding based on the value of their outstanding accounts receivables. The company will transfer the funds to the client’s bank account, allowing them to access the cash they need to run their business.
Invoice Submission: The client will submit invoices to the factoring business, which will then verify them and send them to the client’s customers for payment.
Collections: The factoring business will then follow up with the client’s customers to ensure that payments are made on time. This involves sending reminders and following up with customers who are past due.
Risk Management: Throughout the process, the factoring business will continually monitor its risk exposure and take steps to mitigate any potential losses. This may involve reviewing credit limits, monitoring payment trends, and adjusting funding levels.
Customer Support: The factoring business will also provide ongoing customer support to its clients, addressing any questions or concerns they may have about the financing process.

d. The Supply Chain

A supply chain is not applicable to a factoring business.

e. Sources of Income

Sherly Bentley© Factoring Company, Inc. makes money from;

Factoring Fees
Interest Income
Ancillary Services.

7. Financial Plan

A. amount needed to start your factoring company.

Sherly Bentley© Factoring Company, Inc. would need an estimate of $75,000 to successfully set up our factoring company in the United States of America. Please note that this amount includes the salaries of all our staff for the first month of operation.

b. What are the Costs Involved?

Business Registration Fees – $750.
Legal expenses for obtaining licenses and permits – $1,300.
Marketing, Branding, and Promotions – $1,000.
Business Consultant Fee – $2,500.
Insurance – $5,400.
Rent/Lease – $25,000.
Other start-up expenses include commercial satellite TV subscriptions, stationery ($500), and phone and utility deposits ($2,800).
Operational Cost (salaries of employees, payments of bills et al) – $30,000
Start-up Inventory – $15,000
Store Equipment (cash register, security, ventilation, signage) – $4,750
Furnishing and Equipping – $15,000
Website: $600
Opening party: $3,000
Miscellaneous: $2,000

c. Do You Need to Build a Facility? If YES, How Much will it cost?

Sherly Bentley© Factoring Company, Inc. will not build a new facility for our factoring company; we intend to start with a long-term lease and after 5 years, we will start the process of acquiring our own facility.

d. What are the Ongoing Expenses for Running a Factoring company?

Utility bills (internet subscriptions, phone bills, signage, and software renewal fees et al)
Salaries of employees
Marketing costs

e. What is the Average Salary of your Staff?

Chief Operating Officer (Owner) – $68,000 Per Year
Admin and HR Manager – $48,000 Per Year
Marketing and Sales Executive (Business Developer) – $42,000 Per Year
Accountant $38,000 Per Year
Customer Service Officer (Receptionist) – $26,100 Per Year

f. How Do You Get Funding to Start a Factoring Company

Raising money from personal savings and sale of personal stocks and properties
Raising money from investors and business partners
Sell shares to interested investors
Applying for a loan from your bank/banks
Pitching your business idea and applying for business grants and seed funding from the government, donor organizations, and angel investors
Source for soft loans from your family members and friends.

8. Financial Projection

A. how much should you charge for your service.

Sherly Bentley© Factoring Company, Inc. will charge based on what is obtainable in the United States. Factoring companies in the US typically charge fees that range from 1% to 5% of the invoice amount.

The exact fee charged by a factoring company can vary based on factors such as the creditworthiness of the customer, the volume of invoices being factored in, and the length of time it takes for the customer to pay. Some factoring companies may also charge additional fees for services such as credit checks and collection efforts.

b. Sales Forecast?

First Fiscal Year (FY1): $250,000
Second Fiscal Year (FY2): $290,000
Third Fiscal Year (FY3): $420,000

c. Estimated Profit You Will Make a Year?

First Fiscal Year (FY1) (Profit After Tax): $70,000
Second Fiscal Year (FY2) (Profit After Tax): $150,000
Third Fiscal Year (FY3) (Profit After Tax): $250,000

d. Profit Margin of a Factoring Company

The ideal profit margin we hope to make at Sherly Bentley© Factoring Company, Inc. will be between 16 and 20 percent on each job carried out irrespective of the distance covered.

9. Growth Plan

A. how do you intend to grow and expand by opening more retail outlets/offices or selling a franchise.

Sherly Bentley© Factoring Company, Inc. will grow our factoring company by opening other offices in key cities in the United States of America within the first five years of establishing the business.

b. Where do you intend to expand to and why?

Sherly Bentley© Factoring Company, Inc. plans to expand to;

Portland, Maine
Orange Beach, Alabama
Ocracoke, North Carolina
Block Island, Rhode Island
Los Angeles, California
Long Beach, Washington
Newport, Rhode Island
Chicago, Illinois
Clearwater, Florida
Carmel-by-the-Sea, California.

The reason we intend to expand to these geographic locations is the fact that available statistics show that the cities listed above have the most thriving factoring markets in the United States.

10. Exit Plan

The founder of Sherly Bentley© Factoring Company, Inc. plans to exit the business via merger and acquisition. We intend to merge with an international factoring company that has a world spread so that the management of the company can be placed under a trusted hand when the founder retires.

The goal of combining two or more international factoring companies is to try and achieve synergy – where the whole (the new company) is greater than the sum of its parts (the former two separate entities) and with a well-structured management team and board of trustees.

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Home » Financial Services

How to Start a Factoring Company [Business Plan]

A factoring company is a company that offers financial transactions and a type of debtor finance in which a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount. A business will sometimes factor its receivable assets to meet its present and immediate cash needs.

Factoring is also seen as a form of invoice discounting in many markets. With factoring, accounts receivable is discounted to allow the buyer to make a profit upon the settlement of the debt. Factoring transfers the ownership of accounts to another party that then chases up the debt.

Statistics have it that in the United States there are over 862 factoring companies (invoice discounting companies) employing about 5,420 employees, and the industry rakes in over $5 billion annually.

Steps on How to Start a Factoring Company

Conduct market research.

The first step in the market research process for your factoring company is to develop market-based research questions in line with your overall business goal and objective. In this regard, you should source information that will help you maximize your business, give you easy access to reliable business techniques and processes that will help you operate your factoring company with less stress, and help you build the business to profitability within the shortest time frame.

a. Who is the Target Market for a Factoring Company?

Importer and Exporters
Transport and Logistics companies
Entrepreneurs and Start-Ups

b. Is a Factoring company a Profitable Business?

Yes, a factoring company is a profitable business because there are loads of startups and medium-scale businesses in the United States that rely on factoring companies to help them accelerate their cash flow.

c. Are There Existing Niches in the Industry?

There is no niche area in factoring but it is common for some factoring companies to specialize in any of the following;

Real Estate Factoring
Medical Factoring
Haulage (Transport Factoring)
Construction Factoring.

d. Who are the Major Competitors?

RTS Financial
TCI Business Capital
Riviera Financing
Triumph Business Capita
Paragon Financial
Wells Fargo & Company
HSBC Invoice Finance (UK) Ltd
NatWest Group Plc
Bibby Financial Services Ltd
Lloyds Bank Commercial Finance Ltd.
Tenet Financial Group
Liquid Capital Corp.
Interface Financial Group
United Check Cashing®
Expense Reduction Coaching
RMH Business Solutions, Inc.
The Tayne Law Group

e. Are There County or State Regulations or Zoning Laws for a Factoring Company?

No, there are no county or state regulations or zoning laws for a factoring company, but players in this industry are expected to work with the existing regulations governing similar businesses in the county or state where their business is domiciled.

f. Is There a Franchise for Factoring Company?

Yes, there are franchise opportunities for a factoring company. Here are some of them;

Tenet Financial Group (Initial Investment: $40,000).
Liquid Capital Corp. (Total Investment: $200,000)
Interface Financial Group (Initial Investment: $86,800)
United Check Cashing® (Initial Investment: $226,000)
ProfitPlus Accounts (Initial Investment: $30,000)
TaxLeaf (Initial Investment: $40,000)
Expense Reduction Coaching (Initial Investment: $66,000)
RMH Business Solutions, Inc. (Initial Investment: $41,050)
The Tayne Law Group (Initial Investment: $83,820)
Supporting Strategies (Initial Investment: $76,930).

g. What Do You Need to Start a Factoring Company?

A Feasibility Report
Business and Marketing Plans
Business Licenses and Permits
Office Space
Computers, Laptops, and Servers
EIN (Employer Identification Number)/Federal Tax ID Number.
A Corporate Bank Account
Hardware Equipment and Tools
Software Apps
Startup Capital

Memorable Business Name ideas for a Factoring Company

Boom Books© Factoring Company, Inc.
Moore® Factoring Firm, LLC
Pence© Factoring Company, Inc.
All Solutions® Factoring Company, Inc.
Penny Wise™ Factoring Company, Inc.
Smith™ Factoring Company, LLC.
Money Now© Factoring Company, LLC
Cash Down® Factoring Company, Inc.
Hilary Jorgen© Factoring Company, Inc.
Kelly Gray© Factoring Company, Inc.
Mike Kester® Factoring Company, Inc.
Union Group® Factoring Company, Inc.
TM Morris® Factoring Company, Inc.
Tripple Pay® Factoring Company, Inc.
Nathan Fred® Factoring Company, Inc.
Rowland Hyden© Factoring Company, Inc.
Scene Fit™ Factoring Company, LLC
Access Group® Factoring Company, Inc.
West Payment® Factoring Company, Inc.
Zion Group™ Factoring Company, Inc.

Register Your Business

A. what type of business structure is best for a factoring company.

Even though there are several options when it comes to the business structure of a factoring company, the one that most players in this line of business consider is an LLC. It is common to consider an LLC because providers want to protect themselves from lawsuits.

Please note that an LLC will need an EIN if it has employees or if it will be required to file any of the excise tax forms listed below.

b. Steps to Form an LLC

Choose a Name for Your LLC.
File Articles of Organization.
Choose a registered agent.
Decide on member vs. manager management.
Create an LLC operating agreement.
Comply with other tax and regulatory requirements.
File annual reports.

c. What Type of License is Needed to Open a Factoring Company?

General Business License
Zonal Permits (Applicable in some cities)
Signage Permit

d. What Type of Certification is Needed to Open a Factoring Company?

Factoring Quality Certificate
FCI Certification

e. What Documents are Needed to Open a Factoring Company?

Business and liability insurance
Federal Tax Payer’s ID
State Permit and Building Approval
Certificate of Incorporation
Business License
Business Plan
Employment Agreement (offer letters)
Operating Agreement for LLCs
Insurance Policy
Online Terms of Use
Online Privacy Policy Document
Contract Document
Company Bylaws
Memorandum of Understanding (MoU)

f. Do You Need a Trademark, Copyright, or Patent?

If you are considering starting a factoring company, you may not have any need to file for intellectual property protection or trademark. This is because the nature of the business makes it possible for you to successfully run it without having any cause to challenge anybody in court for illegally making use of your company’s intellectual properties.

Cost Analysis and Budgeting

A. how much does it cost to start a factoring company.

When it comes to starting a factoring company, the startup costs could range from $50,000 to over $500,000 depending on how big you want to start the business. Please note that this amount includes your working capital and of course, the salaries of all the staff for the first month of operation.

b. What are the Cost Involved in Starting a Factoring Company

The total fee for registering the business in the United States of America – $750.
Legal expenses for obtaining licenses and permits as well as the accounting services (software, P.O.S machines, and other software) – $3,300.
Marketing promotion expenses for the grand opening of the factoring company for $3,500 and as well as flyer printing (2,000 flyers at $0.04 per copy) for the total amount of $3,580.
The total cost for hiring a business consultant including writing a business plan – $2,500.
The total cost for the purchase of insurance (general liability, workers’ compensation, and property-casualty) coverage at a total premium (initial (first) premium) – $2,400.
The cost for renting or leasing operational office space – $45,000.
Other start-up expenses including, commercial satellite TV subscriptions, stationery ($500), and phone and utility deposits ($2,800).
Operational cost for the first 3 months (salaries of employees, payments of bills and software renewal fees et al) – $15,000
The cost for the purchase of software apps: $50,000
The cost for store equipment (cash register, security, ventilation, signage) – $1,750
The cost of purchase and installation of CCTVs: $2,000
The cost of launching a website: $2000
Miscellaneous: $2,000

c. What Factors Determine the Cost of Opening a Factoring Company?

The size of the factoring company
The choice of location
The required licenses and permits
The type of facility
The additional service offerings
The cost of hiring and paying a business consultant and attorney
The cost for branding, promotion, and marketing of the factoring company
The cost for furnishing and equipping the facility
The cost for insurance policy covers
The cost for registering the business
Source of your supplies and ongoing expenses
Cost of recruiting and training your staff
The cost of the purchase and customizing of uniforms

d. Do You Need to Build a Facility? If YES, How Much Will It Cost?

You don’t need to build a facility for your factoring company because it is a business that can be operated from a leased or rented office space or home office. You may just decide to operate from your home and just lease shared office space for corporate fronting.

e. What are the Ongoing Expenses of a Factoring Company?

Utility bills (internet subscriptions, phone bills, signage and software renewal fees et al)
Transport and logistics
Salaries of employees

f. What is the Average Salary of your Staff?

Chief Executive Officer (President) – $45,000 Per Year
Human Resources and Admin Manager – $35,000 Per Year
Batch Processor / Data Entry Specialist – $34,500 Per Year
Factoring Account Manager – $32,000 Per Year
Freight Factoring Business Development Officer – $30,000 Per Year
Processor · Junior Underwriter – $30,000 Per Year
Client Service Executive (Help Desk Office) -$28,000 Per Year

g. How Do You Get Funding to Start a Factoring Company

Raising money from personal savings and sale of personal stocks and properties
Raising money from investors and business partners
Sell shares to interested investors
Applying for a loan from your bank/banks
Source for soft loans from your family members and friends.

Write a Business Plan

A. executive summary.

Rowland Hyden© Factoring Company, Inc. is a registered and licensed factoring company. The business will be based in Springfield – Illinois. We were able to secure a well-positioned and standard office facility in one of the most patronized office complexes in Springfield. We are aware that to run a standard factoring business can be demanding which is why we are well trained, certified, and equipped to perform excellently well in our chosen line of business.

b. Products and Service

Invoice discounting
Debt financing.

c. Mission Statement

Our mission is to provide professional and highly reliable factoring services that will help businesses generate the required upfront cash flow they need to run their businesses seamlessly.

Vision Statement

Our vision is to build a factoring company that will become the number one choice for individuals, families, and corporate clients in the whole of Springfield – Illinois.

d. Goals and Objectives

The goals and objectives of the factoring company are to provide short-term financing in exchange for business invoices or accounts receivables. Operators mainly generate revenue through factor fees or the difference between the price paid for the invoice and the money received from debtors.

e. Organizational Structure

Chief Executive Officer (President)
Human Resources and Admin Manager
Batch Processor/Data Entry Specialist
Factoring Account Manager
Freight Factoring Business Development Officer
Processor · Junior Underwriter
Client Service Executive (Help Desk Office)

Marketing Plan

A. swot analysis.

Effective structure in place to help consumers enjoy invoices or accounts receivables transactions
Highly experienced and qualified employees and management
Highly secured payment platform
Access to finance from business partners
Water-tight strategies on how to expand beyond the major markets
Good returns on investment for our investors.
Financial Constraints
A new business that will be competing with well-established factoring companies and traditional banks
Inability to retain our highly experienced and qualified employees longer than we want

Opportunities:

Partnerships and mergers between established companies and factoring startups are becoming more frequent.
Good support structure for factoring companies in the United States of America.
The arrival of a new factoring company within our market space
Unfavorable government policy and regulations
Differences in management and culture are the biggest barriers to integrating factoring startups into traditional companies
Liability problems
Continuously changing consumer demands especially as it relates to how they expect factoring companies to serve them.

b. How Do Factoring Companies Make Money?

Factoring companies generate revenue through factor fees or the difference between the price paid for the invoice and money received from debtors.

c. Payment Options

Payment via bank transfer
Payment via credit cards
Payment via online bank transfer
Payment via check
Payment via mobile money transfer
Payment via bank draft

d. Sales & Advertising Strategies

Introduce your factoring company and the services your offer by sending introductory letters alongside your brochure to corporate organizations, construction companies, haulage companies, medical billing companies, and other key stakeholders throughout the city where your factoring company is located.
Advertise on the internet on blogs and forums, and also on social media like Twitter, Facebook, LinkedIn to get your message across
Create a basic website for your business to give your business an online presence
Directly market your services
Advertise your business in community-based newspapers, local TV and radio stations
List your business on yellow pages ads (local directories)
Encourage the use of word-of-mouth marketing (referrals)

Financial Projection

A. how much should you charge for your service.

A factoring company may charge 2 percent for the first 30 days and 0.5 percent for every 10 days that the invoice remains unpaid. Fees are often referred to as invoice discounting rates. Some factoring companies offer a flat fee structure where a one-time fee is charged upfront.

b. How Much Profit Do Factoring Company Owners Make a Year?

A small factoring company owner will make between $50,000 to over $100,000 per year.

c. What Factors Determine the Amount of Profit to Be Made?

The capacity of the factoring company
The location of the factoring company is covering
The management style of the factoring company
The business approach of the factoring company
The advertising and marketing strategies adopted by the factoring company
The number of years the factoring company is in business

d. What is the Profit Margin of a Factoring Company?

The profit margin of a factoring company is not fixed. It could range between 10% to 15% of the fee income earned by the funder per month.

e. What is the Sales Forecast?

Below is the sales forecast for a factoring company. It is based on the location of the business and other factors as it relates to such startups in the United States;

First Fiscal Year (FY1): $350,000
Second Fiscal Year (FY2): $480,000
Third Fiscal Year (FY3): $600,000

Set Up your Office

A. how do you choose a perfect location for factoring company.

The demography of the location especially as it relates to small and medium scale businesses
The demand for the services of factoring companies in the location
The purchasing power of businesses and the residents of the location
Accessibility of the location
The number of factoring companies in the location
The local laws and regulations in the community/state
Traffic, parking and security et al

b. What State and City are Best to Open a Factoring Company?

Brattleboro, Vermont
Tucson, Arizona
Silver Spring, Maryland
Rowland Heights, California
Portland, Oregon
Richmond, Virginia
Green Bay, Wisconsin
Plano, Texas

c. What Equipment is Needed to Operate a Factoring Company?

You should be prepared to purchase software applications, computers/laptops, servers, storage, and internet facility, telephone, fax machine, and office furniture (chairs, tables, and shelves) amongst others, and all these can be gotten fairly used.

Hire Employees

When it comes to hiring employees for a standard Factoring company, you should make plans to hire a competent Chief Executive Officer (President), Human Resources and Admin Manager, Batch Processor/Data Entry Specialist, Factoring Account Manager, Freight Factoring Business Development Officer, Processor – Junior Underwriter and Client Service Executive (Help Desk Office).

Launch the Business Proper

You can decide to open your factoring company with a party, though it is not compulsory. You can choose to do a soft opening if you are operating on a low budget or you can go for a grand opening party.

The bottom line is that with a proper launching of the factoring company, you will officially inform people in your city that your factoring company is open for business.

a. What Makes a Factoring Company Successful?

Ability to identify good deals
Willingness to take chances
Customer-centric business approach
Good marketing
Strong vision
Passionate leadership
Ability to Innovate

b. What Happens During a Typical Day at a Factoring company?

The office is open for the day’s work
The To-do list is reviewed
Employees go straight to their job description
Marketers go out to market the service offerings of the company
Reports are written and submitted to superior officers
The business is closed for the day.

c. What Skills and Experience Do You Need to Build a Factoring Company?

Excellent marketing skills
Excellent computer skills
Ability to Pay Attention to Details
Good managerial and human development skills
Good Accounting and Bookkeeping Skills
Team-building & Interpersonal Skills.
Excellent communication and negotiation skills.
Organizational skills.
Problem-solving ability.
Good Supervisory skills
Experience in managing factoring related services business
Experience in managing people
Experience in business administration
Experience in handling relevant software.

Best of How To Start A Factoring Business

Over the past few years I’ve written several articles about starting your own factoring business. Much of the information referred to resources, capital, due diligence and general topics related to the asset based lending industry.

Since the interest level on this topic has remained so high I felt that it would be a good idea to do a “Best of How To Start A Factoring Business” compiled from previous articles and questions we have received over the last few years.

1. Should I begin as a factoring agent or broker rather than starting a direct funding company?

First, understand what invoice factoring is and how it can benefit your client. Experience has revealed it’s better to start slow and learn the ropes as you go along. Fortunately you can earn commissions while you learn.

Before factoring my first invoice directly, I worked as a broker. I didn’t fund many deals but the experience of working with different factoring companies allowed me to gain valuable information. When starting as a factoring agent, ask the funding companies what they need to make advances on invoices. Most factors are very cooperative knowing your success can equal more business for them.

When deciding where to start take the time to inventory your existing experience. Whenever possible start by offering services to a specific industry that aligns with your base of knowledge. While the factoring side might be new you’ll have familiarity with the general business operation and better understand the client’s needs.

2. Can I work in the factoring business part-time?

Of course you can. Just understand the part-time option is usually a better fit for brokers rather than funding companies. We find clients are demanding and rightfully so. While office hours are generally Monday through Friday, I cannot tell you how many calls or emails we respond to after hours and on weekends.

When a client is trying to make payroll for the week by factoring invoices you can understand why they are urgently hoping to track you down. On the other hand, you might structure your company to have a limited number of clients or schedule funding on certain days of the week. If this is the case, you may be able to manage your book of business on a part-time basis as a direct funding company.

3. How do I market my factoring business to find new clients?

While not always the first question posed, it eventually comes up in almost every conversation – as it should. A sound marketing plan is essential to your success. It will either make or break a business in any industry.

The marketing strategy doesn’t need to be a formal plan consisting of hundreds of pages of text with graphs and charts, but you do need a path to follow or you will get lost very quickly.

However, one size does not fit all. If there were a true golden ticket we would all march down to the Willy Wonka chocolate factory and claim our prize.

Maybe you enjoy working with a specific client profile or have experience in a particular industry. Have you worked in the health care field? Then medical factoring could be a natural fit. Previously involved in the transportation industry? Consider exploring trucking or freight factoring.

Identify your factoring niche and formulate a plan to penetrate it.

Learn from the real life experience of those that have successfully walked the path before you in books like Marketing Methods for Small Factors and Brokers.

The Internet provides endless resources you can utilize to research industries, markets, and strategies. It is up to you to create your unique house brand and implement the information to use to grow your business.

4. Where can I find more information on starting a factoring company?

The accounts receivable funding industry has many associations, professionals and publications that provide educational guidance and useful information. Here are three to jump-start your efforts:

The Factoring Investor website is an excellent resource for learning about the factoring industry . There are great articles in the “ Factoring 101 ” category from a variety of industry experts with different points of view.

Finally, I highly recommend reading the “ Small Business Factoring Series ” written by Jeff Callender, a 20 year factoring professional. His collection of six books serves as a how-to guide for becoming a factoring broker, agent, or company.

It’s up to you to control how far you want to go in the factoring business. Chart your own course, plan extensively, and most importantly – enjoy the journey.

For more information, he can be reached at [email protected] or you can visit his company’s website at www.oxygenfunding.com

Factoring Business Plan Template & Guidebook

Starting a factoring business has never been easier. From writing a business plan to understanding the financials of your business, the #1 Factoring Business Plan Template & Guidebook provides an all-in-one resource to set you up for success. Get up and running fast with step-by-step guidance, sample plans, and expert advice - all in one place to ensure your business plan is ready to go. See how this invaluable resource can help you build a solid foundation for the future of your factoring business.

Get worry-free services and support to launch your business starting at $0 plus state fees.

How to Write a Factoring Business Plan in 7 Steps:

1. describe the purpose of your factoring business..

The first step to writing your business plan is to describe the purpose of your factoring business. This includes describing why you are starting this type of business, and what problems it will solve for customers. This is a quick way to get your mind thinking about the customers’ problems. It also helps you identify what makes your business different from others in its industry.

It also helps to include a vision statement so that readers can understand what type of company you want to build.

Here is an example of a purpose mission statement for a factoring business:

Our mission at [Name of Factoring Business] is to provide efficient, cost-effective financial solutions that meet the short-term cash flow needs of small and mid-sized businesses. We strive to build mutually beneficial partnerships with our clients, focusing on delivering quality customer service, competitive pricing, and flexible financial packages designed to help our clients reach their goals.

2. Products & Services Offered by Your Factoring Business.

The next step is to outline your products and services for your factoring business.

When you think about the products and services that you offer, it's helpful to ask yourself the following questions:

What is my business?
What are the products and/or services that I offer?
Why am I offering these particular products and/or services?
How do I differentiate myself from competitors with similar offerings?
How will I market my products and services?

You may want to do a comparison of your business plan against those of other competitors in the area, or even with online reviews. This way, you can find out what people like about them and what they don’t like, so that you can either improve upon their offerings or avoid doing so altogether.

3. Build a Creative Marketing Stratgey.

If you don't have a marketing plan for your factoring business, it's time to write one. Your marketing plan should be part of your business plan and be a roadmap to your goals.

A good marketing plan for your factoring business includes the following elements:

Target market

Who is your target market?
What do these customers have in common?
How many of them are there?
How can you best reach them with your message or product?

Customer base

Who are your current customers?
Where did they come from (i.e., referrals)?
How can their experience with your factoring business help make them repeat customers, consumers, visitors, subscribers, or advocates for other people in their network or industry who might also benefit from using this service, product, or brand?

Product or service description

How does it work, what features does it have, and what are its benefits?
Can anyone use this product or service regardless of age or gender?
Can anyone visually see themselves using this product or service?
How will they feel when they do so? If so, how long will the feeling last after purchasing (or trying) the product/service for the first time?

Competitive analysis

Which companies are competing with yours today (and why)?
Which ones may enter into competition with yours tomorrow if they find out about it now through word-of-mouth advertising; social media networks; friends' recommendations; etc.)
What specific advantages does each competitor offer over yours currently?

Marketing channels

Which marketing channel do you intend to leverage to attract new customers?
What is your estimated marketing budget needed?
What is the projected cost to acquire a new customer?
How many of your customers do you instead will return?

Form an LLC in your state!

4. Write Your Operational Plan.

Next, you'll need to build your operational plan. This section describes the type of business you'll be running, and includes the steps involved in your operations.

In it, you should list:

The equipment and facilities needed
Who will be involved in the business (employees, contractors)
Financial requirements for each step
Milestones & KPIs
Location of your business
Zoning & permits required for the business

What equipment, supplies, or permits are needed to run a factoring business?

Computer with Internet access
Factoring software to manage accounts receivable and collections
Business telephone system
Accounting software to manage expenses and income
Certificate of Authority from the state, if applicable
Insurance policy to protect against potential losses
Bank account for deposits and payments
Credit report on all clients, as applicable

5. Management & Organization of Your Factoring Business.

The second part of your factoring business plan is to develop a management and organization section.

This section will cover all of the following:

How many employees you need in order to run your factoring business. This should include the roles they will play (for example, one person may be responsible for managing administrative duties while another might be in charge of customer service).
The structure of your management team. The higher-ups like yourself should be able to delegate tasks through lower-level managers who are directly responsible for their given department (inventory and sales, etc.).
How you’re going to make sure that everyone on board is doing their job well. You’ll want check-ins with employees regularly so they have time to ask questions or voice concerns if needed; this also gives you time to offer support where necessary while staying informed on how things are going within individual departments too!

6. Factoring Business Startup Expenses & Captial Needed.

This section should be broken down by month and year. If you are still in the planning stage of your business, it may be helpful to estimate how much money will be needed each month until you reach profitability.

Typically, expenses for your business can be broken into a few basic categories:

Startup Costs

Startup costs are typically the first expenses you will incur when beginning an enterprise. These include legal fees, accounting expenses, and other costs associated with getting your business off the ground. The amount of money needed to start a factoring business varies based on many different variables, but below are a few different types of startup costs for a factoring business.

Running & Operating Costs

Running costs refer to ongoing expenses related directly with operating your business over time like electricity bills or salaries paid out each month. These types of expenses will vary greatly depending on multiple variables such as location, team size, utility costs, etc.

Marketing & Sales Expenses

You should include any costs associated with marketing and sales, such as advertising and promotions, website design or maintenance. Also, consider any additional expenses that may be incurred if you decide to launch a new product or service line. For example, if your factoring business has an existing website that needs an upgrade in order to sell more products or services, then this should be listed here.

7. Financial Plan & Projections

A financial plan is an important part of any business plan, as it outlines how the business will generate revenue and profit, and how it will use that profit to grow and sustain itself. To devise a financial plan for your factoring business, you will need to consider a number of factors, including your start-up costs, operating costs, projected revenue, and expenses.

Here are some steps you can follow to devise a financial plan for your factoring business plan:

Determine your start-up costs: This will include the cost of purchasing or leasing the space where you will operate your business, as well as the cost of buying or leasing any equipment or supplies that you need to start the business.
Estimate your operating costs: Operating costs will include utilities, such as electricity, gas, and water, as well as labor costs for employees, if any, and the cost of purchasing any materials or supplies that you will need to run your business.
Project your revenue: To project your revenue, you will need to consider the number of customers you expect to have and the average amount they will spend on each visit. You can use this information to estimate how much money you will make from selling your products or services.
Estimate your expenses: In addition to your operating costs, you will need to consider other expenses, such as insurance, marketing, and maintenance. You will also need to set aside money for taxes and other fees.
Create a budget: Once you have estimated your start-up costs, operating costs, revenue, and expenses, you can use this information to create a budget for your business. This will help you to see how much money you will need to start the business, and how much profit you can expect to make.
Develop a plan for using your profit: Finally, you will need to decide how you will use your profit to grow and sustain your business. This might include investing in new equipment, expanding the business, or saving for a rainy day.

Frequently Asked Questions About Factoring Business Plans:

Why do you need a business plan for a factoring business.

A business plan is an essential document for any business, including a factoring business. It allows the business to plan out how to reach its goals and objectives, such as how much capital is needed, who the target market is, and the strategies used to generate revenue. Moreover, it can be used to track progress and make necessary adjustments as the business evolves. Additionally, a well-thought out business plan can help convince potential investors or partners of the viability of the factoring business.

Who should you ask for help with your factoring business plan?

An experienced business consultant or mentor, such as a professional accountant or small business adviser, can be a great resource for help with crafting a factoring business plan. Additionally, experienced factoring companies can provide valuable advice on market trends and how to structure your business. It's also a good idea to do some research online and in industry publications to gather more information on business plans and trends in the industry.

Can you write a factoring business plan yourself?

Yes, it is possible to write a business plan for a factoring company yourself. However, it is beneficial to consult with an expert or professional who understands the industry and the various aspects that need to be considered when writing a business plan for this type of business. It is important to have a thorough understanding of the different elements involved in developing and managing a successful factoring business, including understanding the risks and potential rewards associated with offering factoring services. Additionally, a qualified professional can provide guidance on the best strategies to pursue in order to maximize profits while minimizing risk.

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A Guide to Factoring for Business: Unlocking Cash Flow Potential

Last updated 03/28/2024 by

Fact checked by

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Understanding factoring, benefits of factoring.

Enhanced working capital for business operations and growth: With a stable cash flow, businesses can cover day-to-day expenses, invest in new projects, purchase inventory, and expand their operations without being hindered by cash flow constraints.
Access to immediate funds for business needs: Factoring ensures businesses have the financial flexibility to address sudden expenses or opportunities, such as meeting payroll, paying suppliers promptly, or investing in equipment.
Mitigating the risk of bad debts: Factoring companies often conduct credit checks on the business’s customers before accepting their invoices. This evaluation helps reduce the risk of dealing with customers who have a history of delayed payments or defaulting on their obligations.

How factoring works

Invoice submission: To initiate the factoring process, a business submits its accounts receivable invoices to the factoring company for evaluation. These invoices represent the amount owed to the business by its customers.
Payment collection: After the advance is provided, the factoring company takes on the responsibility of collecting payments from the business’s customers. The factor handles the invoicing and follows up with customers to ensure timely payment. This relieves the business from the task of chasing payments and streamlines the collection process.
Final payment: Once the customers pay the invoices, the factoring company deducts its fees and charges from the remaining invoice amount. These fees cover the cost of financing and the services provided by the factor, including credit checks and collection efforts. The remaining balance , known as the reserve, is then provided to the business.

Selecting a factoring company

Industry expertise and experience: Look for a factoring company that specializes in your industry. Industry expertise ensures that the factor understands the unique challenges and requirements of your business. They can provide tailored solutions and offer valuable insights to support your growth.
Rates and fees structure: Compare the rates and fees offered by different factoring companies. Assess the cost of factoring in relation to the services provided. It’s essential to understand the factor’s fee structure, including any hidden fees or additional charges, to make an informed decision.
Transparency and customer support: Choose a factoring company that maintains transparency throughout the process. They should clearly communicate their terms and conditions, fees, and contract terms. Additionally, ensure the factor offers reliable and responsive customer support to address any inquiries or concerns promptly.
Contract terms and flexibility: Carefully review the contract terms before entering into an agreement with a factoring company. Consider factors such as contract duration, termination clauses, and any potential penalties. Seek a factor that offers flexibility in terms of the volume of invoices you can factor and the ability to adjust the arrangement as your business evolves.

Frequently asked questions (FAQ)

What types of businesses can benefit from factoring, is factoring a form of debt, how does factoring differ from traditional bank loans, can a business with bad credit still qualify for factoring, can a business choose which invoices to factor, key takeaways.

Factoring allows businesses to convert accounts receivable invoices into immediate cash, improving cash flow management.
By leveraging factoring, businesses can access working capital for day-to-day expenses and growth opportunities.
Factoring provides immediate funds for business needs, such as paying suppliers, meeting payroll, or investing in equipment.
It helps mitigate the risk of bad debts by conducting credit checks on customers and evaluating their payment history.
When selecting a factoring company, consider their industry expertise, rates and fees structure, transparency, and contract terms.

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What Is Factoring and Is it Right for My Business?

When business owners are trying to get working capital to finance their business operations, the first choice is often a small business loan or line of credit. But if you can’t get approved for a loan, or don’t want to borrow money at the moment, there are also some alternative finance options to help your company get a quick influx of cash.

One of the “non-loan” forms of small business finance is factoring , also known as accounts receivable financing. Factoring can be a viable option for your business to get cash when you need it most—but it’s important to be aware of the possible drawbacks before you commit to working with a factoring company.

Factoring is a unique type of cash advance financial service where companies can get money by trading their unpaid invoices to a factoring company or “factor,” which then collects payment on the business’s behalf. With factoring, instead of getting paid directly by your customers in the usual way, your company agrees to give your unpaid receivables to a third-party firm (the “factor”) that gives you cash upfront as a certain percentage of the total value of the outstanding receivables.

How Factoring Works

Let’s say your company needs quick cash, and has $100,000 in receivables for a particular month. You could sell those receivables to a factor, which would typically pay you 75% of the value of the receivables upfront, followed by an additional percentage payment after the factor collects payment from your customers.

Factors make money by keeping a percentage of the value of your invoices—usually 2% to 6%—so you do have to give up a percentage of your profits in order to work with a factor. In this example, assuming that your factor charged a fee of 6% of the value of the receivables, your company would get $75,000 upfront, and then an additional $19,000 within 30 to 90 days after all payments had been collected.

So instead of getting all $100,000 from those receivables (and waiting to get paid), you would get a total of $94,000, with $75,000 collected immediately. However, you would also have to pay interest to the factor on that $75,000 cash advance—and interest rates depend on your overall creditworthiness, the quality of your receivables, and the terms of your deal.

Points to Consider

Factoring is actually a very old form of business finance , and it is quite common in certain industries where slow-paying receivables are the norm. Although factoring can be a good option for your company to raise an immediate influx of working capital, you have to weigh the benefits against the possible costs and drawbacks of factoring.

Benefits of factoring include:

Immediate Cash: Factoring gives your company an immediate cash influx when you need it most. Instead of waiting 30 to 60 days or more for all of your customers to pay their bills, you can get an immediate windfall all at once.
No Loans: Factoring is not the same as a loan—it does not affect your credit score or require you to make ongoing payments. Factoring is just a simple trade: Giving up a percentage of future profits in exchange for immediate cash today.
Keep Your Equity: Factoring does not require you to sell any percentage of your company or share equity as you would have to do with raising capital from investors. Instead of taking out a long-term loan or giving up equity to new investor-partners, factoring can be a one-time decision to get cash for a specific business goal, or to recover from a temporary financial setback.

Possible drawbacks of factoring include:

Reputational Risks: When your business works with a factor, your customers will be notified that the factor is now responsible for collecting their payment. Often this is no big deal—factoring is a legitimate and longstanding business practice. But some customers might get confused, or start to worry that your business is having cash flow problems, or wonder if your company is at risk for going out of business. So communicate upfront with customers if you decide to use factoring—explain the situation and reassure their concerns.
Change in Business Processes: Depending on your deal with the factoring company, the factor might want you to make some changes in your business operations or payment processes. For example, you might be encouraged to stop doing business with certain customers who have poor credit or slow payment histories. Be prepared to give up some control over your business if you want to get money from a factor.
Costs: Factoring is not cheap. In addition to giving up a percentage of your total profits in each batch of receivables that you finance, you have to pay interest on the cash advance provided by the factor. Depending on the terms of your agreement with the factor—which vary by your credit score and your customers’ likeliness to quickly pay their bills—the total costs of receivables financing can be significant. So make sure to read the fine print and understand what you are agreeing to before you commit.

Giving up a percentage of your total profits is never an idea that is taken lightly by business owners. However, factoring can be a worthwhile solution to help your company get quick cash without some of the long-term commitments and costs that are related to getting a small business loan or raising capital from investors. Just be sure that you understand all the details, costs, and risks before you sign on to the factoring agreement.

American Express® Business Line of Credit offers the security of a business line of credit and helps business owners qualify in minutes. This commitment to the small business community has allowed American Express® Business Line of Credit to fund over $1.6 billion and gain the trust of more than 100,000 small business owners.

This article was originally written on July 11, 2016 and updated on February 13, 2023.

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Babs Nelsen

Babs is the Senior Manager of Content Strategy at Nav, the leading financial health platform for small business owners. When she’s not diving into the best financing solutions and the latest news in small businesses, you’ll find her binge-watching musicals, reading in the (sporadic) Chicago sunshine and discovering great new places to eat. Accio, tacos!

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One response to “ What Is Factoring and Is it Right for My Business? ”

Very informative. Good analysis of the costs and benefits of factoring.

Invoice Factoring: The Complete Guide for Small Businesses

by Curt Powell - Executive Vice President | Jul 13, 2023 | Blog

Invoice factoring - Everything you need to know to decide if it is right for your construction company.

When a small business struggles with maintaining day-to-day cash flow due to clients’ long payment durations or overdue payments, they may need an alternative, stop-gap solution. Selling unpaid invoices to another company is often a quick, low-stress option used in many industries.

In this article, we share insights from over 25 years at CapitalPlus . Having assisted thousands of small businesses with factoring, we’ll guide you through everything needed to determine if invoice factoring is the right fit for your business.

Contents: • What Exactly is Invoice Factoring and How Does It Work? • Advantages of Invoice Factoring • Common Types of Factoring • Invoice Factoring vs. Other Funding Options • Misconceptions About Invoice Factoring • Is Invoice Factoring Legal? • What to Know When Assessing Factoring Companies —— factoring fees/costs , reputation , specialization , funding limits , customer service , recourse/non-recourse • Invoice Factoring Requirements and Eligibility • The Invoice Factoring Steps and Timeline • Tips for Getting the Most Out of Factoring • Real-World Factoring Examples • Is Invoice Factoring Right for You? A Checklist

Introduction to Invoice Factoring

Utilized across various industries like construction, trucking, and staffing, Factoring is used to temporarily bridge day-to-day cash shortfalls while awaiting client payments to arrive. It is used when other financial alternatives, like bank loans or merchant cash advances, don’t make financial sense.

According to a 2022 Capstone report , there are approximately 682 factoring companies in the US. An IBISWorld report highlights that the industry employed 5,374 individuals and supplied an estimated $3.85 trillion in 2023. These robust figures and future projections suggest factoring will remain a key financial industry component.

What is Invoice Factoring? How Does It Work?

In simple terms, a business sells its yet-to-be-paid invoices to a factoring company or “Factor”. The factoring company then “advances” a percentage of that invoice amount upfront. Depending on the industry the advance would be anywhere between 70% to 85%, but can go as high as the mid-90s for trucking or staffing industries.

Infographic showing a typical invoice factoring process.

After the invoice is paid by the client, the factoring company will return the remaining percent to the company, less its fees .

Factoring example based on a $50,000 invoice:


Initial (Advance) Payment Amount	80% advance rate	$40,000
Factoring Fee	4% flat rate	$2,000
Additional Fees*	$500 application fee	$500
Returned Remainder	after client payment (30 to 90 days)	$7,500

* This example uses a typical factoring fee percentage; however, each factoring company will have its own factoring fees and/or rates, and possibly additional fees (see “ other fees “).

Advantages of Invoice Factoring

In the right situation, there are many advantages for a company to use factoring:

Fast Access to Working Capital

Speed is often the top reason companies partner with factoring companies. Compared to the time it takes to get a bank loan (assuming you can even be approved for it), receiving money by factoring invoices can take as little as one business day after the account is created. Factoring allows you to continue building your business without being constrained by slow paying clients.

Infographic showing the Invoice Factoring Payment Timeline: comparing the length of time to receive funds with and without factoring.

>> RELATED ARTICLE: How to Speed Up the Construction Factoring Application Process

Use Factoring Funds for What’s Needed

Quick access to working capital allows you, the contractor, to not just pay off previous projects but also use funds for:

pay reoccurring overhead such as rent, utilities, lease payments, payroll
pay external contractors
purchase materials and supplies
invest in growth-inducing areas such as marketing and advertising
hire employees or staff-up for upcoming projects
expand operational capacity or improve efficiency with new computers/software, tools/equipment, and other upgrades

Keep Your Extended Payment Terms

Another benefit of invoice factoring is that it allows companies with cash flow issues to continue to bid on jobs with 30 to 90-day payment terms. The factoring company ensures you are paid quickly – they wait for the client’s payments. This enables you to compete effectively without avoiding projects with extended payment terms.

Ease of Qualifying

It can be a difficult and lengthy process to qualify for many business financing solutions like lines of credit from banks, especially if you are in construction. But factoring has a relatively simple qualifying process. Most companies are able to easily contract with a factoring company if their invoices reflect they have already worked with creditable clients.

Part of the complexity of trying to get a bank loan will be providing the mountains of paperwork . While there will be paperwork needs associated with factoring, when you apply, you probably WON’T need to supply this exhaustive list often required by banks.

Bank loans require extensive paperwork including :

A loan application
The project’s details
Contractor’s qualifications
Financial statements
The invoice contract s
Insurance documentation
Personal and business documents

In addition to all this paperwork, banks take time to assess everything and make a decision.

While obtaining bank loans is generally more difficult, there are also things that make obtaining factoring difficult. A factoring company will not like certain types of liens, numerous financial obligations, or legal issues within your business. If you are free of these, you should qualify for factoring without issue.

The Invoices Are the Collateral

Loans and lines of credit often require substantial collateral. Factoring, however, only uses your invoices as collateral. This means you can keep your materials, equipment, and other assets separate.

Small or New Companies Can Factor Invoices

Traditional banks loan can be hard to get if you are not a large, well-established entity. However, factoring supports these smaller companies in maintaining cash flow, even if they have slow-paying clients. The decision-makers approve factoring primarily based on your client’s credit history not yours. This means that if there’s minimal or less-than-perfect credit, factoring can be a powerful solution for smaller companies looking to pay bills and grow their business.

Disadvantages of Factoring

Of course, factoring is not a perfect solution for every situation. Most frequently mentioned disadvantage is higher fees , which are usually higher than bank fees (but less than Merchant Cash Advances). Of course, these fees vary among factoring companies, it’s best to get clarity in advance.

Another potential disadvantage is the change in the relationship with your customer. The factoring company will communicate directly with your customer, which can lead to an awkward discussion if not communicated beforehand.

>> IN-DEPTH ARTICLE: The Pros and Cons of Factoring

Common Types of Factoring

Spot factoring.

Spot factoring is a subset of the usual invoice factoring. Spot factoring allows contractors to sell single, specific invoices rather than all invoices. While it offers tailored benefits, it can be slightly harder to obtain compared to traditional factoring.

Whole Turnover Factoring

Whole turnover factoring involves selling all invoices over an extended time periodIt encompasses the company’s entire accounts receivable portfolio of business. Unlike traditional factoring which tends to be more of a stop-gap solution, whole turnover factoring provides consistent and continuous financing. However, can be difficult to obtain and costly.

Government Contract Factoring

As the name implies, this involves the selling of a government-issued invoice. Working with the government can have its unique challenges such as navigating the Assignment of Claims Act which requires special knowledge that not all factoring companies have. The overall process of applying for government contract factoring is very similar to other forms of factoring.

Reverse Factoring

Reverse factoring is very similar to traditional factoring with the only difference being who sells and who pays. With traditional factoring, a business would sell an invoice to a factoring company and use the funds to pay, for example, for a materials order. With reverse factoring, the materials supplier sells their own invoices (at a discount) to the factoring company. After a predetermined time or at job completion, the buyer pays the factoring company for the materials. The factoring company acts as a middleman getting paid for extending payment terms.

“Traditional” Factoring process:

business orders materials
business requests factoring
business receives factoring funds
business uses factoring to pay for the materials
business pays the factoring company after project completion

Reverse Factoring process:

business needs materials
supplier requests factoring
supplier receives payment (factoring funds) for the materials
business pays a factoring company for the materials after project completion

Since there are multiple agreements by all parties and pre-approval checks, reverse factoring can be more involved to set up in the beginning.

Comparing Invoice Factoring to Other Funding Options

When it comes to funding options, small businesses have several choices, including traditional bank loans, lines of credit, and merchant cash advances (MCAs). Here’s how invoice factoring compares:

Factoring vs. Bank Loans

Factoring differs from traditional bank loans in that it provides immediate access to funds based on the value of outstanding invoices, whereas bank loans require collateral and a lengthy application process. Factoring focuses on the creditworthiness of the business’s customers, whereas bank loans primarily consider the creditworthiness of the business itself. The trade-off is that factoring is typically more expensive than bank loans.

>> RELATED ARTICLE: What to Expect When Getting A Bank Loan in Construction

Factoring vs. Lines of Credit

Lines of credit offer flexible access to funds, allowing you to borrow as needed up to a certain limit. However, similar to bank loans, they require a lengthy application process and good credit history not found in factoring. Additionally, lines of credit often come with variable interest rates, which can lead to higher costs over time.

Invoice Factoring vs. Merchant Cash Advances (MCA)

The factoring of invoices differs from merchant cash advances in that factoring works from the sale of an actual unpaid invoice, whereas merchant cash advances provide a lump sum loan payment based on a percentage of your past credit card sales . An MCA will look at these numbers and decide what you should be able to pay. Their high interest rates can vary widely between companies. They are repaid by pulling a percentage of weekly or even daily sales directly from the company’s bank account. For the struggling company, this can be difficult for those with already limited or erratic cash flow.

Invoice Factoring vs. Invoice Financing

Unlike invoice factoring where the business sells unpaid invoices upfront to a third party, invoice financing is where the business borrows money from a lender using its unpaid invoices as collateral. In this case, the lender will make its money by charging interest on the loan, which will vary depending on the lender and the creditworthiness of the business. And because invoice financing is a specialized loan, if there are any problems, penalties will be added.

The business may choose invoice financing over factoring if it wants to retain ownership of its invoices and can afford to wait for the payments to come in. A con of invoice financing is the business is still in charge of collecting the invoices and making payments, unlike factoring where the factor collects their payment.

>> IN-DEPTH ARTICLE: 19 Financing Options Available to Construction Businesses

Common Misconceptions of Invoice Factoring

To the person who has not factored invoices before, it is easy to believe stories that may or may not be based on real situations. These misconceptions are ones typically heard when discussing factoring.

Factoring is Only Used When in Financial Trouble

Some believe that factoring may give the impression that your company is experiencing financial troubles. However, invoice factoring can be a strategic financial tool used by many profitable businesses, including construction companies, to proactively manage their cash flow. It can demonstrate a commitment to meeting financial obligations promptly. Factoring can actually enhance a company’s reputation as a reliable and financially stable business.

Factoring Creates Complications with Existing Financing

Some companies may believe that factoring can create complications with their existing financing arrangements. However, factoring is a separate financing solution that does not typically interfere with existing business loans or lines of credit. Factoring companies primarily evaluate the creditworthiness of the company’s customers rather than the company itself. This means that they can still maintain their current financing relationships while benefiting from the additional working capital provided by factoring.

Factoring Hurts the Customer Relationships

It is not unheard of to believe that factoring puts a strain on a company’s customer relationships again implying financial troubles. However, factoring is a common and widely accepted practice in business. The factoring company typically operates discreetly, and customers are usually fine working with a third-party factor in the transaction.

>> RELATED ARTICLE: Top 6 and 1/2 Myths About Factoring Companies

Is Invoice Factoring Legal?

Yes, factoring is legal, fully recognized under the law, and widely used in various industries, including the construction sector. As long as all parties involved agree to the terms and conditions of the factoring arrangement, it is a legal and viable method for supplementing cash flow and addressing short-term financial needs. However, it is essential to thoroughly understand the terms of the factoring agreement, know the fees involved, and work with reputable factoring companies to ensure that everything is fair and beneficial to both you and the factoring company.

infographic overviewing the top 5 things to look for when assessing an invoice factoring company

What to Know When Assessing Invoice Factoring Companies

There are many aspects that need to be considered when picking the best factoring company for your unique situation. However, we have listed a few of the common things to look for when doing a quick assessment.

1. The Invoice Factoring Fees, Rates, and Other Costs

Like funding’s dollar amounts, factoring fees vary depending on many options. Such aspects that have an effect on rates are the size of the company needing financing, the creditworthiness of its customers, the number of invoices being factored, how long they commit to working with the factoring company, whether they repeat customers, and other specific terms outlined in the factoring agreement. While individual rates may vary across industries, a typical invoice factoring fee range for the construction industry is around 2% to 5% of the total invoice value.

Other Fees and Charges:

Often included with the standard invoice factoring fee(s) there may also be additional costs. It’s essential to review and understand all fees involved before entering into the agreement.

Fees that you might see when working with a factoring company:

Setup/Due Diligence/Origination/Underwriting fee : You might be charged a one-time fee when you start the service. These fees are used to pay for some of the initial assessments of you and your clients. Some companies assess this in the form of a refundable deposit.
Minimum Volume Requirement fees : a fee for when invoices fall below certain amounts.
Wire transfer fee: Charged by some companies if the client pays by wire transfer. It might also be charged if you want to receive your payment in this form.
Returned check fee : You might be assessed this fee if your client bounces the payment check.
Interest fee : A fee for when waiting for invoices to be paid. This may be assessed as a one-time fee, or accumulated weekly/monthly.
Lockbox fee : For the security of all involved, factoring companies will often set up lock boxes for receiving payments. This fee covers the cost.
Late payment fee : Charged if a client pays their invoice after the agreed-upon due date.
Cancellation/Early Termination fee : Charged when ending the contract early with the factoring company.
“Customer Service” and other fees : miscellaneous fees going by various names that a company might assess. Because these fees can be nondescript it is important to first, know that they exist, and second, be clear about what is involved upfront.

Because there is no industry standard, is important to understand that you might be assessed some, all, or none of these fees as part of your factoring arrangement. When working with reputable factoring companies your specific fee structure will be discussed in the initial phone call and outlined in your factoring agreement. None of these fees should ever be surprise “hidden fees”.

2. The Factoring Company’s Reputation

With so many choices in the factoring world, it can be difficult to choose a good one. How do you know they are reputable? They are often members of trade associations and educational groups like the Construction Financial Management Association or the International Factoring Association . Trusted factoring companies will often receive positive reviews and testimonials on Google or at the Better Business Bureau. Of course, you can always ask other people in your industry. They are usually happy to share their experiences – both good and bad.

3. Industry Specialization of the Factor

When researching factoring companies there will be many to pick from. Some support multiple industries, while others choose to focus on unique businesses such as trucking or construction. When considering whether to work with a specialized factoring company, it’s important to weigh the specific needs and goals of your business. You should choose a factoring partner that aligns with those requirements offering the expertise necessary to support your success in the industry.

One advantage of working with factoring companies that specialize is they will be familiar with the unique world of that industry’s clients and their debtors. They understand the typical payment practices of that industry and can accurately assess the creditworthiness of those debtors. This knowledge helps them make informed decisions about which invoices to finance, reducing the risk of non-payment.

Additionally, factoring companies that specialize in, for example, the construction industry, often have an established network and connections within the industry. This synergy could open doors to potential customers, recommend subcontractors, and other industry professionals. They may also have relationships with other service providers such as insurance brokers and construction attorneys. They will even work with other factoring companies, meaning that if the factoring company is not a good fit, the factor will be able to refer to another that is.

4. The Factor’s Funding Limits

As a general guideline, the funding limit range in construction, for example, typically falls between $100,000 and several million dollars. Larger companies with established track records and strong financials may be able to secure higher funding limits. It’s important to note that the funding limit is determined on a case-by-case basis and is subject to the factoring company’s assessment and the risk associated with its invoices.

5. Their Customer Service and Support

One of the significant advantages of utilizing an industry-specific factoring company is the level of customer service and communication they provide. Unlike larger companies or banks where it can be challenging to connect with a real person over the phone, working with a smaller factoring company increases the likelihood of prompt assistance from someone familiar with your business and situation. This eliminates the frustration of navigating through automated phone systems and dealing with representatives who are unfamiliar with your industry. By choosing a smaller company, you can enjoy the convenience of connecting with a person you have worked with before… who knows you by name.

Another benefit is that specialized factoring companies might offer industry-specific support services. They can assist with lien management, offer Notice of Assignment ( NOA ) services, and provide guidance on navigating construction regulations.

6. Recourse vs. Non-Recourse Factoring Agreement

When you decide that factoring is right for your business, another aspect to be clear about is whether the factoring is recourse or non-recourse. This aspect of factoring refers to who is ultimately liable if the payment is not received . With recourse factoring, also known as “full factoring”, the business selling the invoices retains the ultimate responsibility for payment. With non-recourse factoring, the factoring company assumes all the credit risk for non-payment by the debtor. If the debtor fails to pay, the loss is absorbed by the factoring company, relieving the business of any obligation to repurchase the invoice.

If a Factor does not advertise that they are recourse or non-recourse factoring, they more than likely offer recourse factoring since that is the safest option for them. It is worth noting that non-recourse factoring will typically come with higher rates to try to offset the risk.

The Invoice Factoring Company’s Requirements and Eligibility

Because of the unique nature of factoring, the requirements can be unique compared to other funding choices. Most requirements are designed to protect not only themselves but also the company they are helping. Every factoring company has its own list so ask questions before committing.

Your General Operations Paperwork

As a general protection, factoring companies will often ask for basic business documents. It goes without saying, giving money to a business that cannot provide a copy of a business license or show proof of insurance is reckless.

Indicators of Your Business’s “Health”

A Factor may want to see documents that help them get an idea of the company’s historic business practices, such as taking work and not completing it. The Factor does not want the client to refuse to pay the invoice because the terms of the job were never completed. Examples of requested paperwork might be P&Ls or balance sheets. Keep in mind that the factoring company is not looking for spotless financials. They want to get a general overview of the past difficulty the business has endured and how it was dealt with.

Your Current Contractual Obligations

Knowing how the company has worked, both in the present and in the future, is a big determinant for making the decision whether to or not extend factoring money. It indicates both a company’s ability to complete work and not have upcoming financial issues due to lack of work.

One financial area a Factor looks for is other current loans or financial obligations. It is not unusual to work with companies that take out loans to pay other ones. But it is a problem when it is obvious that the company is overextended to the point that it will never be able to pay everyone back.

It might sound strange, but a Factor might also ask about your company’s ownership. They want to be sure the key players involved know about the factoring agreement. It is not unheard of to have one owner trying to hide financials from another owner. Having the signature of both helps ensure communication by all.

Your Company’s Minimum Invoice Amounts

As with all businesses, there are costs involved in running a factoring company. And because they usually work off percentages, factoring a low-dollar-amount invoice may not return enough income to offset the labor costs required to service the account. As a result, Factors have minimum requirements on the invoices they will consider. Some smaller factoring companies may be more willing to work with lower invoice amounts like $5,000 to $10,000. Larger, more established factoring companies may need larger invoices, including those in the $50,000 to $100,000 range or even higher.

The Invoice Factoring Steps and Timeline

While there is not one standard application process that every company uses, applying for factoring does not usually have many steps. And with simplicity and fewer steps, there is usually quicker funding .

Factoring Steps - The 5 step process of applying for factoring money from CapitalPlus Financial Services

1. Phone Meeting – Understanding Your Business

Requesting factoring here at CapitalPlus typically starts with an introductory phone call. We will ask a few simple questions about your business. For example, we like to know your billing cycle, and if you have other loans (and the types they are). This helps us determine if invoice factoring will help you and if different factoring options might be a better option for your needs. We do NOT want to recommend a service that is not a perfect fit – we are looking to build a long-term relationship. At this point, you will have a clear idea of all the factoring costs and a general timeline.

2. Official Agreement and Factoring Underwriting Paperwork

When every question is answered and everyone is confident that invoice factoring is a perfect fit, we will send you an application to become a client and a term sheet formally outlining all the details discussed in the phone meeting like your factoring fees and terms.

After we receive your application, we will request a few documents as part of our underwriting process. An example of documents we need is your business license, proof that you have insurance, and a copy of the invoice(s) being factored for example.

3. Application Approval

Our factoring underwriting department will take over from here. If all documents meet their standards, you will be notified that you are now an “official” client.

We will then send your client a factoring Notice of Assignment (NOA) letting them know about your new relationship with CapitalPlus and that we will be in contact with them. We will also request a copy of the invoice(s) from the client showing the invoice amounts to verify that all numbers match what was submitted before.

4. Payment Funding

After all the above information has been checked and signed off, you will receive the initial payment. Depending on whether you are bonded or not, the amount is 70% to 80% of the invoice’s face value.

5. Collection and Payment

Once your client pays the invoice and contacts us letting us know the job is complete to their standards, we will send you the remaining 20 to 30% less our factoring fee. Of course, you will know this exact factoring fee after the initial discovery phone call and agreement paperwork.

Please note that this process may not exactly match the process of all factoring companies. It is the process we have built in the 25+ years we have been offering this service.

Tips for Getting the Most Out of Invoice Factoring

Communicate with your clients early.

Because a Factor will be working directly with your client, it’s best to make them aware of the new relationship. Most of the time they have no problem with the arrangement, but being surprised can unnerve them. So clear and early communication is key.

Consider Using Factoring Strategically

While it is most typical to use factoring after cash flow gets tight, do not ignore the idea that factoring can be used proactively. It might make more financial sense to use factoring and take projects with high profit than turn away work simply because invoice factoring has fees. Knowing every cost upfront, including using factoring as a strategy allows you to weigh choices that make your company the most money.

Reevaluate Previous Factoring Rates and Agreements

Factoring companies will do all they can to find solutions to best fit your situation… at that time. But you should not discount factoring as a funding option because you assume past terms are fixed. Factors like CapitalPlus have different percentage rates based on different invoice dollar amounts, repeat history with you as a client, and many other circumstances. Factoring rates change… get a new quote before assuming you should not consider factoring.

Real-world Factoring Examples

To provide a clearer understanding of how invoice factoring works in practice, let’s explore some real-world scenarios that our company has had in the past 25+ years. Because these examples are based on actual construction clients, their names have been hidden, but the amazing results are clearly visible.

Example 1: Concrete Contractor — Michael W.

Scenario: Michael was on cloud nine after securing a $1,200,000 contract with the City of Houston. However, his excitement was short-lived. Despite his extensive experience in the concrete industry, his fledgling company lacked established credit. This led to multiple rejections when he sought lines of credit from banks. Michael soon recognized the looming financial challenge if he couldn’t secure substantial upfront funding.

Solution: After contracting CapitalPlus, Michael found that factoring was the ideal solution for his problem, especially since his credit history wouldn’t be a barrier. Through factoring, he quickly received $960,000, helping him purchase the necessary materials for the project within a few days. Once his client settled the invoice 65 days later, he received the remaining 20% (minus the factoring fees).

Example 2: General Contractor — James S.

Scenario: James was really feeling the pinch of slow payments after completing his most recent project at a luxury resort in South Florida. Stressed that he might possibly miss paying his subcontractors, he turned to CapitalPlus for factoring.

Solution: He quickly secured $280,000 of factoring money. In addition, his stress was reduced even more using their complementary internal lien monitoring.

Example 3: Mechanical Electrical and Plumbing Contractor — Joseph L.

Scenario: Joseph needed working capital to purchase over a million dollars of new materials and supplies if he wanted to take on an exciting new project. Because the job did not allow materials to be invoiced at delivery, not having a cash infusion would mean he would have to pass on the opportunity.

Solution: Being a returning client, the funding process was expedited allowing him to get the $2,000,000 in receivables financing the very next day. This was a game-changer for his business allowing him to quickly buy the materials needed for the project.

>>RELATED READING: See more of CapitalPlus’ case studies

Is Invoice Factoring Right for You? A Checklist.

Factoring should be considered a viable option for a small business if:

there is a lag time between you completing a job and getting paid.

your business is new or does not have established credit (but your client does).

you don’t have time to wait on the bank’s slow paperwork processing and decision-making.

you need money but don’t want an option that affects (or potentially hurts) your credit rating.

With any financial solution, factoring companies included, some will be a perfect fit, others won’t. By understanding the advantages and disadvantages and carefully selecting a factoring company, you can make an informed decision that benefits your business.

Remember, factoring is NOT for everyone. If you have questions about how factoring might fit within your unique business needs, feel free to reach out at 865-670-2345 or schedule a call .

Learn how CapitalPlus can help your business. Pick your specific construction focus to get started!

About the Author : Curt Powell — Executive Vice President Joining the team in 2016, Curt serves as Executive VP at CapitalPlus Financial Services, a direct lender based in Knoxville, Tennessee focusing exclusively on the construction industry. During that time he has walked thousands of business owners through the financing options to find the best solution for their needs. Curt is a member of The International Factoring Association, The Association of General Contractors, and the Construction Financial Management Association.

CapitalPlus was established in 1998 providing over $1 billion in factoring funds empowering thousands of construction companies all over the US.

Article Sources:

IBIS World. “Invoice Factoring Industry in the US , https://www.ibisworld.com/industry-statistics/number-of-businesses/invoice-factoring-united-states/”
360iResearch.” Factoring Market by Type , https://www.360iresearch.com/library/intelligence/factoring”
Capstone. “ 2022 State of the Factoring Industry Report , https://capstonetrade.com/2022-state-of-the-factoring-industry-report/
Nerdwallet. “ Business Loan Requirements: 7 Things You’ll Need to Qualify , https://www.nerdwallet.com/article/small-business/how-to-qualify-for-small-business-loans”
Construction Financial Management Association . “https://cfma.org/”
International Factoring Association . “https://www.factoring.org”
Acquisition.gov. “ Subpart 32.8 – Assignment of Claims , https://www.acquisition.gov/far/subpart-32.8″

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Invoice Factoring: What It Is and How It Works

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What is invoice factoring?

Invoice factoring is a type of business financing that involves selling your unpaid invoices to a third party at a discount in exchange for an advance of cash. This type of funding allows B2B companies to access fast capital in order to manage cash flow issues or pay for short-term expenses.

Invoice factoring is also referred to as accounts receivable factoring or debt factoring .

How much do you need?

with Fundera by NerdWallet

We’ll start with a brief questionnaire to better understand the unique needs of your business.

Once we uncover your personalized matches, our team will consult you on the process moving forward.

How does invoice factoring work?

Invoice factoring isn’t technically a small-business loan . Instead, you’re selling your outstanding invoices to a third party, usually a factoring company, at a discount.

In exchange, the factoring company advances you a percentage of your invoice amount, possibly up to 90%. The company assumes responsibility for collecting full repayment on your invoice and once it receives that payment, it sends you the difference, minus the agreed-upon fees.

How invoice factoring works

Paper documents wrapped with a ribbon that has a checkmark on it.

How much does invoice factoring cost?

Factoring companies typically charge fees at a flat rate, ranging from 1% to 5% of the invoice value per month. Additional fees may include service fees, monthly minimum fees and origination fees, among others.

The specific factoring fee you receive will range based on the invoice amount, your sales volume, your customer’s creditworthiness and whether your factoring agreement is recourse or non-recourse .

If you have a recourse factoring agreement, you are ultimately held responsible for the debt if your customer fails to repay their invoice. With non-recourse factoring, on the other hand, the factoring company assumes most of the risk associated with nonpayment. If your customer doesn’t pay, the company accepts that loss.

Non-recourse factoring agreements are less common, but will often have higher transaction fees because of the additional risk the factoring company takes on.

» MORE: Current business loan rates


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Invoice factoring example

Here’s a more detailed example of how invoice factoring works:

You invoice your customer. You sell goods to another business, creating a $10,000 invoice.

You sell your invoice to a factoring company. The factoring company agrees to buy your invoice and advance you 85% of the total value, or $8,500.

Factoring company assumes responsibility for your invoice. The company collects repayment from your customer.

The factoring company charges fees. The factoring company charges a 3% factor fee for every 30 days it takes your customer to pay the invoice. Your customer pays in 30 days, so your fee will be 3% of $10,000, or $300.

The factoring company sends you the remaining balance, minus fees. Now that your customer has paid, the factoring company will send you the remaining 15% of the invoice amount, or $1,500, minus the $300 fee. You’ll receive a total of $1,200 back. This means at the end of the process, you’ve received $9,700 out of the total invoice amount of $10,000 — calculating to an approximate APR of 42.35%.

Pros and cons of invoice factoring

Fast cash. Invoice factoring can provide immediate access to working capital to help cover a funding gap caused by slow-paying customers.

Improved cash flow. Factoring can also allow you to keep loyal customers on longer payment terms while still improving your cash flow to help you grow your business.

Easier to qualify . Factoring companies often prioritize the value of your invoices and the creditworthiness of your customers when evaluating your application, as opposed to more standard business loan requirements . This makes invoice factoring a good option for businesses that may not qualify for more traditional loan options, such as startups or those with poor credit histories.

No collateral required. Because you’re selling your invoices to a factoring company, this type of financing doesn’t typically require another type of collateral , such as real estate or inventory.

Can be expensive Invoice factoring can be expensive. Although fees may seem affordable at first, they can become costly fast if your customer takes a long time to repay. You also have to watch out for hidden fees, such as application fees, processing fees for each invoice you finance, credit check fees or late fees if your client is past due on a payment.

Not for every business. Invoice factoring is best for businesses that work with other businesses because transactions involve invoices. Businesses that sell or work directly with consumers, therefore, won't qualify for this option.

Loss of direct control. With invoice factoring, your factoring company works directly with your customers. This means you must trust your factoring company to deal with your customers in a responsible and fair manner, and hope they don’t affect your relationships in a negative way.

Invoice factoring vs. invoice financing

Invoice factoring may be confused with invoice financing , which is a similar type of business funding.

With invoice financing, however, you use your unpaid invoices as collateral to get a cash advance in the form of a loan or line of credit. You remain responsible for collecting payment on your invoices. Once your customer pays, you repay your lender the amount loaned, plus fees and interest.

Although both of these types of business loans can be good for B2B companies that need fast access to capital, invoice financing may be better-suited for businesses that want to retain control over their invoices.

If you have a strong relationship with your customers and they repay their invoices on time, invoice financing may also be a more affordable alternative to invoice factoring.

» MORE: Our full comparison of invoice factoring vs. invoice financing

Find the right business loan

The best business loan is generally the one with the lowest rates and most ideal terms. But other factors — like time to fund and your business’s qualifications — can help determine which option you should choose. NerdWallet recommends comparing small-business loans to find the right fit for your business.

Factoring invoices can be a good idea for B2B companies that have capital tied up in unpaid invoices. This type of financing can be used to manage cash flow issues and pay for short-term expenses.

You don’t necessarily need good personal credit to qualify for invoice factoring. Instead, many factoring companies prioritize the creditworthiness of your customers, as well as their reputation and the value of your invoices.

Some banks may offer invoice factoring, but factoring companies are often direct lenders or fintech companies. Banks that offer invoice factoring include the Southern Bank Company (through its division AltLINE ), TAB Bank and Zions Bank.

), TAB Bank and Zions Bank.

On a similar note...

How to compare and work with invoice factoring companies

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Key Takeaways

Invoice factoring lets you collect money from unpaid invoices more quickly
You’ll typically pay a percentage of the invoiced amount for this service
It can be a quick way to get financing, but it could lead to cash flow issues if used regularly

If your small business needs funding, invoice factoring can help improve your cash flow. For a fee, invoice factoring companies give cash advances for outstanding invoices and take over collecting the debt.

This is an alternative lending option for small business owners who need cash fast and can’t qualify for traditional business loans. But, not every small business is eligible for invoice factoring, and it has a few disadvantages, including costly fees.

How to work with an invoice factoring company

Ready to start invoice factoring? Follow these steps to start working with a factoring company.

How to find the right invoice factoring company for you

Invoice factoring companies often differ in the types of factoring they offer, how quickly they send you funds and how funds are disbursed. To help you choose, here’s a look at a few common areas to consider when working with an invoice factoring company.

Check the requirements to apply. Invoice factoring companies generally want to see healthy cash flow in their business and may set minimum revenue guidelines. They will also look at your customers’ creditworthiness to see if they have a history of on-time payments as well as your business’s financial statements. Factoring companies may not be upfront about all their requirements , so contact customer service to ask questions.
Understand which type of invoice factoring you’ll receive. Invoice factoring advances come with a variety of different features that you should be aware of. Features to watch for include:

	vs.
Most common option. Requires the business owner or operator to shoulder the responsibility of unpaid invoices. If a client doesn’t pay the invoice by the due date, the company must buy them back from the factoring company.		The factoring company assumes liability for unpaid invoices. If a client doesn’t pay an invoice, it does not affect how much the business gets from the invoice factoring company. Compared to recourse factoring, this option could come with lower advance rates and higher fees.

The invoice factoring company takes on the invoice and works directly with your client to collect payment, and the client knows you are working with a factoring company.		Used in sensitive situations where businesses do not want clients to know they are using a factoring service. The factoring company interacts minimally with the client, and customers are not notified that you are working with an invoice factoring company.

Also known as single invoice factoring, spot factoring allows businesses to factor only one or a few invoices. They don’t have to factor every invoice.		The invoice factoring company takes over all of your outstanding invoices (or your whole ledger), and you must pay fees for all outstanding invoices.

Ask about invoice factoring fees. Factoring companies usually charge a percentage of the invoice amount as its fee (explained below). Since different companies have different fee structures, you want to make sure you understand how fees get charged with the specific company you’re looking at.
Consider the company’s customer service track record. Some companies also have a better reputation with customers than others. Check websites like the Better Business Bureau to see if other people had a good experience working with them before you make a decision.
Check financing limits and funding speeds. Factoring companies may set a percentage limit on how much funding they will provide to you, called the advance rate. The advance rate is based on the amount of your invoices and typically falls between 70 and 90 percent of your total invoice amount. Most companies can also provide funds quickly, such as one to three business days, but some take longer.

Understand the costs

Factoring companies may charge various fees to use their service. Be sure to read your invoice factoring agreement thoroughly to understand the fees , as they can significantly increase the overall cost of the loan. Here are common fees to look out for:

Sign-up fees
Monthly minimum fee
Early termination fee
Late payment fees
Same-day funding fee
Wire transfer fee
Due diligence fee

In addition to administrative and sign-up fees, factoring companies usually charge a factoring fee or discount rate for advancing you the cash. The fee typically ranges from 0.5 percent to 5 percent, though the structure is different for each factoring company. The fee is usually taken out of the invoice amount as a percentage.

For example, if the factoring fee is 2 percent and the invoice amount is $10,000, the charge would be $200.

Apply for factoring

Once you’re ready to work with an invoice factoring company, gather the necessary documents and resources. Here’s what you may be asked to provide:

Credit-worthy clients: Invoice factoring requires your clients to have good credit (not you) to qualify for an invoice factoring service.
Invoices to factor: You need outstanding invoices to use a factoring service. These are how you will get funding.
Business Tax ID: Your Employer Identification Number identifies you as a business. This also allows the factoring company to look up your business and check for any outstanding liens, which could make you ineligible for invoice factoring.
Business bank account: The factoring company will only work with clients who have a business bank account . This is where they deposit your funds.
Personal identification document: You need to provide a document like your driver’s license, social security number or passport to verify your identity.
Accounts receivable (A/R) aging report: This document shows any current invoices and how long they’ve gone unpaid.
Completed factoring application: This will be different depending on the invoice factoring company you choose, but you can typically expect to provide basic business details, your typical monthly invoicing volume and your industry.

Submit invoices

Once you’ve applied for your business loan and are approved, here’s what happens next:

Submit your invoices to the factoring company.
The factoring company pays you an advance rate for the submitted invoices (as agreed upon in your contract).
The client pays the invoiced amount to the factoring company.
The factoring company collects the agreed-upon factoring fee and any additional fees and pays you any remaining amount you are owed.

Pros and cons of working with an invoice factoring company

Alternative lending options, like invoice factoring, have pros and cons that you need to consider before applying.

Quick funding . Once you sign up for a factoring service, many factoring companies will pay the advance for an invoice within a few days.
Doesn’t require you to have good credit . Invoice factoring is dependent on the creditworthiness of the client, so it’s a good option if you need a business loan with bad credit .
Better cash flow . Waiting for clients to pay invoices can interrupt important cash flow timelines for your business. Invoice factoring gives you a reliable cash flow timeline.
Doesn’t require collateral . Some conventional business loans require you to secure a loan with an asset that the lender can claim if you fail to repay the loan.
Frees up time. Because the invoice factoring company collects the invoices for you, you can devote more time to running your business.
Potential extra fees . Some invoice factoring companies have additional fees on top of the factoring fee. While the service can look affordable, the extra fees can add up, making the service more costly than it’s worth.
Reduced profits. You’ll pay the factoring company out of the payments you receive from clients, which dips into your profit margins.
Doesn’t work if clients have bad credit . If your clients don’t have good credit, the invoice factoring company won’t take on your invoices.
You may have to pay back the factoring company . If you are using a recourse factoring service, you may be required to pay back advances for invoices that are never paid by a client.

Bottom line

An invoice factoring company is worth considering if you’re a small-business owner who needs to overcome a cash shortfall. If your business qualifies, invoice factoring can help you get fast funds to keep your business up and running.

If you decide to work with an invoice factoring company, make sure you understand the risks and costs. Talk to several different companies and understand the terms of their service. Even the best small business loans can have surprises tucked away in the fine print. Make sure you know what you are responsible for when you sign on with a factoring company.

Frequently asked questions

Do you need good credit for invoice factoring, what is the difference between invoice financing and invoice factoring, how much do factoring companies charge.

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Factoring Definition:

A financing method in which a business owner sells accounts receivable at a discount to a third-party funding source to raise capital

One of the oldest forms of business financing, factoring is the cash-management tool of choice for many companies. Factoring is very common in certain industries, such as the clothing industry, where long receivables are part of the business cycle.

In a typical factoring arrangement, the client (you) makes a sale, delivers the product or service and generates an invoice. The factor (the funding source) buys the right to collect on that invoice by agreeing to pay you the invoice's face value less a discount--typically 2 to 6 percent. The factor pays 75 percent to 80 percent of the face value immediately and forwards the remainder (less the discount) when your customer pays.

Because factors extend credit not to their clients but to their clients' customers, they are more concerned about the customers' ability to pay than the client's financial status. That means a company with creditworthy customers may be able to factor even if it can't qualify for a loan.

Once used mostly by large corporations, factoring is becoming more widespread. Still, plenty of misperceptions about factoring remain.

Factoring is not a loan; it does not create a liability on the balance sheet or encumber assets. It is the sale of an asset--in this case, the invoice. And while factoring is considered one of the most expensive forms of financing, that's not always true. Yes, when you compare the discount rate factors charge against the interest rate banks charge, factoring costs more. But if you can't qualify for a loan, it doesn't matter what the interest rate is. Factors also provide services banks do not: They typically take over a significant portion of the accounting work for their clients, help with credit checks, and generate financial reports to let you know where you stand.

The idea that factoring is a last-ditch effort by companies about to go under is another misperception. Walt Plant, regional manager with Altres Financial, a national factoring firm based in Salt Lake City, says the opposite is true: "Most of the businesses we deal with are very much in an upward cycle, going through extremely rapid growth." Plant says you may be a candidate for factoring if your company regularly generates commercial invoices and you could benefit from reducing the time receivables are outstanding. Factoring may provide the cash you need to fund growth or to take advantage of early-payment discounts suppliers offer.

Factoring is a short-term solution; most companies factor for two years or less. Plant says the factor's role is to help clients make the transition to traditional financing. Factors are listed in the telephone directory and often advertise in industry trade publications. Your banker may be able to refer you to a factor. Shop around for someone who understands your industry, can customize a service package for you, and has the financial resources you need.

More from Expansion Financing

Angel investor.

An individual who invests his or her own money in an entrepreneurial company

Friends/Family Financing

Monies, usually in the form a loan, that a business owner gets from either family members or friends in order to help finance their startup or growing business

Government Grants

An award of financial assistance in the form of money by the federal government to an eligible grantee with no expectation that the funds will be paid back. The term does not include technical assistance which provides services instead of money, or other assistance in the form of revenue sharing, loans, loan guarantees, interest subsidies, insurance, or direct appropriations

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Factoring companies are extremely important for most businesses that conduct manufacturing or are engaged in large-scale inventory transactions. Although there are many alternatives to factoring invoice, especially merchant advance account services, these companies are still very popular with businesses that have unique cash flow needs and large invoices that need to be financed on an ongoing basis. Most factoring companies are able to generate substantial gross margins by providing the specialized lending services. In most cases, there is a limited amount of recourse that a factoring company has when they purchase an invoice from a third-party. However, provided that an appropriate credit manual is developed – these companies are generally able to remain profitable in all economic climates. The barriers to entry for new factoring company are somewhat high given the large amount of capital required to start these businesses. Within the factoring company’s plan, a well developed three-year profit and loss statement, cash analysis, balance sheet, breakeven analysis, and business ratios page should be developed to showcase to a potential lender or investor the anticipated financial results of the business. Most banks and lenders are generally willing to provide a line of credit to a factoring company in order to to acquire invoices at a discount. Generally, a factoring company receives a fee equal to 10% of the fact invoice provided that it is paid within a 90 day period.

It is also imperative to develop a factoring company marketing plan. This marketing plan should focus heavily on developing ongoing relationships with companies that are engaged in large-scale manufacturing or product distribution. Frequently, a factoring company will take any booth at a trade convention in order to showcase to the business public its ability to acquire and finance invoices. It should be noted, that certain disclosures regarding lending need to be included as part of the overall advertisements distributed by the factoring company. Additionally, it is imperative these days to have an online presence so that companies can easily find specialized services such as factoring companies. This website should have information pertaining to what industries the company services, hours of operation, contact information, and have developed an ongoing relationship with the business as it relates to factoring invoices.

After the marketing plan and business plan have been developed, a factoring company SWOT analysis should also be created. The specialized document focuses on the strengths, weaknesses, opportunities, and threats that are faced by these businesses. As it relates to the strength of a factoring company, these businesses are generally able to remain profitable in most economic climates while generating very high gross margins from their lending services. For weaknesses, the lending industry – especially as it relates to businesses – is constantly changing. As such, factoring companies face significant competition from other types of financing businesses that specialize in factoring accounts receivables. As it relates to opportunities, a factoring company can continually acquired additional rounds of capital in order to further fuel the growth of the business. Additionally, factoring companies can rapidly expand that the entire United States provided that they have the proper online management systems in place. Pertaining to threats, there is very little about this industry that has changed over the past 50 years outside of being able to work with companies on a nationwide basis. There are currently no known pieces of legislation or regulation that would impact the way that a factoring company conducts business.

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A Basic Introduction To Invoice Factoring For Businesses

WRITTEN & RESEARCHED BY

Lead Staff Writer

Looking for info about invoice factoring? Then you’ve come to the right place!

This cash flow problem-solver can be a tricky beast to tackle, but once you’ve got the hang of it, you’ll be able to get the money you need to run your business without having to wait around for clients to pay off their invoices. This means you can invest cash right back into your business, potentially enabling you to grow at a quicker pace than you might have otherwise.

We’ll be going into plenty of detail below, covering all the ins and outs of invoice factoring — from spot factoring and extra costs to terms and conditions worth knowing and everything in between — so we recommend that you first make yourself cozy with your favorite cup of hot chocolate or perhaps a nice tea.

Ready? Remembered the marshmallows? Then let’s get started!

Table of Contents

What Is Invoice Factoring & How Is It Used?

How invoice factoring works, the differences between invoice factoring and invoice financing, the costs of invoice factoring, common terms & conditions you should know about, alternatives to invoice factoring, how to find an invoice factor.

On the surface, invoice factoring is simple. Businesses sell their invoices, at a discount, to factoring companies (also known as factors ) in exchange for cash up-front. This allows a business to operate normally without worrying about losing money because a client is slow to pay up.

Many businesses in the B2B sector take advantage of factoring. Common industries that use factoring include transportation, government contractors, staffing companies, advertisers and media companies, and any other business that invoices customers.

Put plainly, plenty of merchants employ factoring to keep their businesses running smoothly. If your business operations are impacted by cash flow problems because your clients take too long to pay their invoices, factoring may be for you.

Invoice factoring starts off with a simple transaction when a business sells outstanding invoices to a factoring company. However, the business won’t get the full cash amount of their invoices.

Instead, the factor will hold a small reserve of between 5% – 30% of the invoice value until the customer has paid. This is done so that the factor can protect against risk. The fee for factoring, called the discount rate , and any chargebacks or refunds will come from this reserve.

A typical factoring interaction might look like this:

You sell an unpaid invoice with a value of $10,000 to a factor. The company advances you 85% (or $8,500 ) of the cost upfront and holds 15% (or $1,500 ) in reserve. When your customer pays, the factor will send you the reserve, minus a small fee.

Recourse VS Non-Recourse Factoring

In general, there are two types of factoring — recourse and non-recourse. The difference between the two determines who is responsible if the customer does not pay their invoice .

With recourse factoring — the more common type — you are responsible for paying the bill if your customer cannot or will not pay. Because this arrangement is not as risky for the factor, they’ll normally charge smaller fees. However, an unpaid invoice can present a problem for your business if you do not have the means to cover the costs.

Non-recourse factoring, of course, works differently; if your customer does not pay, the factoring company must simply write off the debt. Note that, under non-recourse agreements, there are still cases in which you will have to re-purchase unpaid invoices (like if the customer refused to pay because you did not fulfill the order correctly). Non-recourse factoring tends to be more expensive because of the additional risk.

Spot Factoring VS High Volume Factoring

Spot factoring is the new kid on the block. Its primary advantage is that you have complete control over which invoices you sell to the factoring company. The more traditional form of factoring (also called high-volume factoring ) usually requires that you enter into a contract where you agree to sell most or all of your invoices.

With spot factoring, you also won’t have to worry about extra fees beyond the basic discount rate. However, this discount rate will usually be higher than what you’ll pay with high-volume factoring. If you’re looking for non-recourse factoring, but also want to go the spot factoring route, you may be out of luck. That’s because spot factoring is inherently riskier to the factoring company, making features like non-recourse factoring less attractive to offer.

You may have ventured across the term “ invoice financing ” when delving into the world of invoice factoring. Both these financial tools offer ways to smooth out cash flow; however, they are separated by some notable differences:

Invoice financing is a loan where you put up your customers’ invoices as collateral . Once you’ve collected your customers’ debts, you’ll pay back your loan.
Invoice factoring involves a transaction where you sell your invoices to a factoring company . This company then typically collects your customers’ invoices on your behalf.

For a full run-down on the differences between factoring and financing, visit our breakdown .

Factors charge a discount rate when you sell an invoice. Many also charge other fees for certain services. Here is what to expect:

The Discount Rate

The discount rate is normally between 1% – 6% per month. Depending on the factor, the rate might accrue on a daily, weekly, or monthly basis. Your fee will be deducted from your reserve (the amount of the invoice that the factor holds back). The longer your customers take to pay, the larger the fee will be.

Your fee is dependent on how risky the factor perceives the transaction to be. If your customers are not creditworthy or your business is in a risky industry you might have higher fees.

For example, if you have a fee of 4% on an invoice worth $1,000 and your customer takes 60 days to pay, you will have a fee of about $80. If your customer takes 90 days, your fee will be about $120.

Other Common Fees

In addition to the discount rate, your factor may charge fees for application, maintenance, or other reasons. Here are common fees you may encounter:

Application Fee: Some factors will charge you to evaluate your application and/or set up the financial arrangement. This fee may be charged up-front or waived until you factor your first invoice.
Diligence Fee: Also known as a setup fee, this charge is another upfront fee. It’s used to perform credit checks, as well as other costs associated with opening an account.
Maintenance Fee: Also known as a servicing or administration fee, this is a catch-all fee used to cover any and all costs associated with keeping your account current.
Lockbox Fee: The factor may charge you a flat fee to keep a lockbox open. This lockbox is a designated account where your customers will pay their invoices to.
Wire Fee: This fee could come about if you choose a wire transfer instead of an ACH transfer (which is preferred by most factors).
Early Termination Fee: Many factors require a contract that usually lasts between six and 18 months. If you need to bow out early, you’ll usually get dinged with a cancellation charge to get out of the contract.

There are a number of terms and conditions you must consider to find a factor that will work for your business.

Contract Length & Termination Notice: Contract length and termination notices vary between factors. Some require long-term contracts and charge fees for canceling before the contract is up. Others may simply require advanced termination notice.
Which Invoices Are Factored: Most companies will let you choose which invoices you decide to sell (as long as the invoice is from an approved customer), but some will require that you sell all invoices from specific customers or all your invoices period.
Monthly Minimums & Maximums: Some factors will require you to sell a certain amount of invoices to them each month, or conversely, may cap the amount that you’re allowed to sell.
Notification VS Non-Notification Factoring: For whatever reason, your business may need to keep your factoring arrangement discreet. If so, you may be able to set up a non-notification agreement, which means that your customers do not know that you have sold their invoices. On the other hand, notification factoring means that your customers are aware of the arrangement.

Invoice Financing

As mentioned above, you can take advantage of invoice financing instead of factoring. Of course, note that invoice financing is technically a loan — you’ll put up your outstanding invoices as collateral. Then a lender will give you a line of credit based on the value of those invoices. Once your customers have paid off their invoices, you can then pay back the lender.

It’s also noteworthy that invoice financing can be more flexible than factoring because you usually get to pick and choose which invoices get financed. On top of that, things can be more private; with invoice financing, your customers may not know that you are involving a third-party because they only interact with you. Factoring, on the other hand, usually involves the third-party reaching out to customers — potentially providing a clue that you’re having cash flow problems.

Traditional Line Of Credit

Another option is to get a traditional business line of credit . Going after a line of credit may require additional legwork. Lenders look at more data points than just your outstanding invoices. Your business will usually need a healthy credit score, have not gone into bankruptcy recently, and have a decent level of revenue. Lenders may also consider the age of business and any available collateral.

Note that a line of credit isn’t a loan — instead, you gain access to a certain amount of money that you can draw from at any time. One of the more common lines of credit is a credit card (although there are other types, too).

Additionally, it’s worth a mention that even if you have poor credit, or have other negative marks against your business, it isn’t impossible to obtain a line of credit . Negative marks will just make it more difficult

Ultimately, you’ll want to find a factor you can trust. On top of that, you’ll need to work with one that offers terms and conditions that best fit your business.

Factoring, unfortunately, isn’t a one-size-fits-all industry. A factoring company that works for someone else may not work for you. However, here at Merchant Maverick, there are a few companies we really like and trust; you can check them out on our invoice factoring comparison page .

Because eligibility for invoice factoring is contingent on the creditworthiness of your customers (and not the health of your business), invoice factoring is a relatively cheap source of financing that will work for a lot of businesses. This means that you should be able to find a company that will fit your needs without breaking the bank.

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Crafting a winning business plan isn't just about putting ideas on paper; it's about strategically paving the road to success. Whether you're starting a new venture or looking to scale an existing one, having a well-structured business plan is essential.

It serves as your roadmap, guiding decisions and attracting potential investors.

This comprehensive document must cover seven key elements that collectively provide direction, showcase potential, and demonstrate viability.

Let's delve into what makes each element indispensable for your business's success.

7 Key Elements for a Successful Business Plan

Creating a solid business plan is crucial for any successful venture. These seven key elements will guide you through the process, ensuring your plan is comprehensive and compelling.

1. Executive Summary

The executive summary is your business plan’s opening statement and should capture the essence of your company in a concise manner. It needs to succinctly outline your business mission, vision, and core values.

Additionally, it should highlight key aspects such as the problems your product or service solves, your unique value proposition, and a brief overview of your target market.

This section is often what potential investors will read first, so make sure it clearly communicates why your business is worth their attention and investment. By effectively summarizing these elements, you set a strong foundation for the rest of your business plan.

2. Market Analysis

Understanding your market is crucial for the success of your business. You need to identify your target audience, understand their needs and preferences, and study the competitive landscape.

Conducting thorough research allows you to anticipate trends and spot potential opportunities or threats within the industry. For instance, if you're venturing into the beverage industry, utilizing a complete alcohol pricing guide can provide valuable insights into setting competitive prices.

By analyzing consumer behavior and competitor strategies, you’ll be better positioned to carve out a niche for your product or service in a crowded marketplace, ensuring long-term growth.

3. Company Description

Your company description provides an in-depth look at the heart of your business. Start by explaining the nature of your business and the industry in which you operate.

Highlight the unique aspects that set you apart from competitors, such as innovative products or exceptional services. Detail your business structure, mentioning whether it's a sole proprietorship, partnership, or corporation.

Include relevant information about your location and any significant milestones reached thus far. This section should give readers a clear understanding of who you are, what you do, and why you're positioned for success in your market.

4. Organization and Management

In this section, you’ll outline the organizational structure of your company. Introduce the key members of your management team and provide insights into their roles, backgrounds, and expertise. Highlight how their unique skills contribute to the company's success. If applicable, include an organizational chart to visually depict team hierarchy and reporting lines.

Also, discuss any advisory boards or consultants that add strategic value. This part is crucial because potential investors need confidence in the team's ability to execute the business plan effectively and steer the company toward its goals.

5. Products or Services Line

Detailing your products or services is essential for conveying their value to potential investors and customers. Describe each offering, including its features, benefits, and the problems it solves. Explain what makes your products or services unique compared to those of competitors.

Highlight any proprietary technology, special ingredients, or innovative processes that set you apart.

Additionally, consider discussing future developments or upcoming product lines that could further enhance your market position. By clearly defining what you offer, you'll help stakeholders understand why your business fills a critical need in the marketplace.

6. Marketing Strategy

Your marketing strategy outlines how you plan to attract and retain customers. Begin by identifying your target market and understanding their behaviors and preferences.

Explain the various channels you'll use to reach this audience, from social media campaigns to traditional advertising methods. Discuss your branding approach, including key messages and unique selling points that will resonate with your customers. Outline any partnerships or collaborations that could amplify your marketing efforts.

This section should clearly demonstrate how you intend to build visibility, generate leads, and drive sales for sustained business growth.

7. Financial Projections & Funding Request

This section is vital for illustrating your business’s financial health and future potential. Provide detailed financial projections, including income statements, cash flow statements, and balance sheets for the next three to five years. Clearly outline your assumptions and include any planned investments or operational changes that might impact these projections.

Additionally, specify the amount of funding you’re seeking, and explain how it will be used to achieve your business objectives. Whether it’s for expanding operations, hiring staff, or launching new products, detailing the intended use of funds helps build investor confidence.

These Elements are Necessary for a Successful Business Plan

Now that you understand the seven key elements of a successful business plan, it's time to take action. Start by considering each component and how it applies to your vision and market.

Remember, a well-thought-out plan is your foundation for success, helping you navigate challenges and seize opportunities. Don't wait - begin drafting your business plan today and set yourself on a path toward achieving your entrepreneurial dreams.

Funded, in part, through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.

An interest rate cut is coming. Here's what to do with your money beforehand.

Photo Illustration: A cutout of scissors, against the backdrop of hundred dollar bills

The Federal Reserve is gearing up to cut interest rates as soon as next month, which could bring relief to people with mortgages, credit cards and car loans. But it could be a bumpy ride until then.

A weaker-than-expected jobs report Friday triggered a sell-off on Wall Street this week from which markets are struggling to recover . And there’s still uncertainty around how deeply the central bank might slash rates , if it does so as expected when it meets in mid-September. Many consumers are looking for some financial stability in the short term while planning to benefit from lower borrowing costs in the medium to long terms.

That balancing act isn’t easy, Bankrate senior economic analyst Mark Hamrick acknowledged. “We should hope for the best,” he said, but “prepare for some possible outcomes that are less than optimal.”

Here are some financial do’s and don’ts experts suggest in the meantime.

DO take advantage of high-yield savings

Now’s still a good time to stash money in accounts paying generous interest.

“Circumstances can occur that are damaging to our personal finances, outside of recessions” or stock market turbulence, said Hamrick, who noted that nearly 60% of U.S. adults are uncomfortable with their current emergency savings. “How we prepare for those things, including how much savings we’re either inclined to or able to put away, are ultimately what helps us to manage through those difficulties.”

Most analysts don’t expect the Fed to cut its benchmark rate more than 0.5 percentage points initially. That means high-yield savings accounts — for which some of the best rates top out at 5.35% — are likely to remain appealing.

DON’T rely too heavily on CDs

Certificates of deposit — fixed-rate bank accounts with term limits — are a go-to when interest rates are high. Some are paying interest at levels that rival those of high-yield savings accounts , and it may seem smart to lock in a 5% yield for many months after the Fed starts lowering rates. But several experts cautioned against over-relying on high-yield CDs.

If you’re close to retirement or have a fixed income, a short-term CD of a year or two might be an “attractive option” to take advantage of interest rates, said Rodney Lake, director of the GW Investment Institute at the George Washington University School of Business.

But “you really have to factor in your time horizon,” he said, because much longer than that could mean lost opportunities to reinvest those funds elsewhere with higher returns.

In addition, cashing out a CD early usually entails a penalty. So “if there’s any chance you might need it, buyer beware,” said Laura Veldkamp, a finance professor at Columbia University’s Graduate School of Business.

DO prioritize credit card debt

Now’s the time to pay down card balances, experts said. Chipping away at your debt and improving your credit score can position you to take advantage of better borrowing conditions.

With interest rates coming down, the idea is just pay and save as much as you can right now.

Laura Veldkamp, Columbia Business School

“With interest rates coming down, the idea is just pay and save as much as you can right now and have that consumption party” later, Veldkamp said. “That’s the sort of timing play here.”

Credit card balances are typically most consumers’ highest-rate debt. While the ratio between U.S. households’ average debt and income remains historically low , credit card delinquency rates have been rising , and those behind on payments face larger balances, Philadelphia Fed researchers said last month.

“Make all your payments on time” if you’re able to, Veldkamp advised. “Be really diligent about it, so that when it comes time to borrow, one looks like a good candidate and can get a good rate.”

DON’T set it and forget it

Simply asking about discounts and special promotions — from utility bills to prescription costs — can yield surprising results , and credit card rates are no different, Hamrick said: Pick up the phone and see what your card issuer can do.

There’s no bad time to do that, but when the central bank lowers interest rates, it can be even more valuable. That’s especially true if your credit card has a variable APR, because not all lenders will quickly or automatically lower it after a Fed cut.

“Not to say they do it on purpose, but maybe they forget to reset your rate down,” Lake said. “Make sure that you hold those people accountable.”

DO put some money in the market …

It might seem counterintuitive to buy stock in the wake of this week’s rout, but many financial advisers live by the “buy low, sell high” mantra. If your experience as an investor is nonexistent or limited to your employer’s 401(k), consider opening an investment account and start small, Veldkamp suggested.

“You don’t have to be a millionaire to have a stock portfolio. Find a simple platform with low fees and buy some things,” she said. For an inexperienced investor without plans to retire any time soon, the key is patience. Over the long term, “if the market crashes, it will rebound,” she said.

… but DON’T try to game it

Fluctuations often motivate investors to take matters into their own hands, but Veldkamp said few tend to outsmart the market.

“It’s tempting to say, ‘Well, when interest rates go down, stocks are going to do well, because people are switching from low-return to higher-return assets,’” she said. “That all may be true, but the fact is that there’s somebody whose job it is to trade on that idea immediately. The second a word exits the mouth of a Federal Reserve official, they are there ready to execute that trade in milliseconds.”

Instead, experts advise keeping a steady, long-haul approach.

“If you’re investing in your retirement, for example, you should be really focused on what the next five, 10 and 20 years look like. You’re investing for those periods,” Lake said.

DO consider mortgage refinancing

With 30-year fixed-rate mortgage rates plunging this week to an average of 6.55%, refinancing demand has surged 16%, according to the Mortgage Bankers Association.

If you’re buying a house and getting into a mortgage, check to see if rates fall can you adjust that mortgage rate.

Jude Boudreaux, Financial Planner, New Orleans

While a Fed interest rate cut would drive mortgage rates lower still, now’s a great time for existing homeowners and prospective ones to scope out their refinancing options, Veldkamp said: “Dig up those details, do your homework, read the fine print and figure out what’s that refinancing cost.”

Jude Boudreaux, a New Orleans-based financial planner, pointed out that most closings take 30 to 60 days, so it’s worth looking ahead even if you’re still in the middle of a sale process.

“If you’re buying a house and getting into a mortgage, check to see if rates fall can you adjust that mortgage rate,” Boudreaux said. “As you’re shopping for a loan, that becomes something to consider.”

DON’T try to time your mortgage

However, Lake warned against looking only at interest rates to time a home purchase, particularly because homebuying demand could jump after a rate cut.

“People should really focus on their individual needs and desires and what they can afford,” he said. “As soon as rates go down, people have more borrowing capacity, so they get pretty quickly reflected in the real estate prices.”

DO hunt for automotive deals

The bad news: “It is doubtful that auto rates will rapidly decline as soon as the Fed starts cutting,” Jonathan Smoke, Cox Automotive’s chief economist, wrote following the Fed’s decision last month to hold rates steady .

The average rate for new vehicles in July was 9.72%, up more than 0.5% year over year but down from 10% in June, Cox said. And the average monthly auto loan payment was $727, said J.D. Power, $5 more than in July 2023.

The good news: Consumers should find plenty of deals in the discounting that typically picks up in August and September as dealers clear lots for new models, Boudreaux said.

Hybrid sales are finally slowing after a springtime surge , according to the auto data firm Edmunds, which means better prices are also likely to be around the corner. And in the secondhand market, one- and two-year-old used car values are down nearly $4,000 from last year.

“If you’re shopping for a new car deal, it might actually be on the other side of the lot,” said Ivan Drury, director of insights at Edmunds.

DON’T rack up costs while waiting to buy a car

Delaying that trip to the dealership can be costly, Hamrick said, especially when it means spending more on Uber rides or missing work because of a lack of wheels. So focus on what you can afford and “bulletproof” your budget for maintenance, repairs and fuel. Chances are that auto purchase will still be net-positive on your wallet.

Hamrick also suggested considering leasing options, even if that means signing a contract before a rate cut. “Maybe you need to trade down on the price point,” he said.

J.J. McCorvey is a business and economy reporter for NBC News.

More From Forbes

Building and work experience factors that are often missed in business plans.

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Jason Ratcliffe MSc, BA (hons), AssocRICS / Director of Steren Surveyors .

Your staff’s overall satisfaction and health is about more than just running a great business. The environment they work in is a crucial and influential factor in optimizing the performance, mental health and general well-being of your employees. This affects how your company is portrayed and represented, which a business plan does not often account for.

Common Issues To Account For

As an entrepreneur and surveyor, I've found that some of the most common issues faced in today's offices include poor indoor air quality, black spot mold, overheating and hard-to-heat areas, which are often left cold and unpleasant. Many businesses also struggle with poor lighting. Such areas can often have a noticeable impact on the health of employees and on the company's finances.

First, I recommend addressing the simple things that do not cost the earth but have a big impact, including ensuring your office has plenty of natural airflow as a preventative measure against the build-up of moisture and black spot mold. To improve the environment for employees, you can also increase the amount of natural lighting where possible and bring some nature indoors with a few easy-to-maintain plants.

Ensuring the property is adequately insulated, external main walls are well maintained, that no double or triple glazing has failed and that your heating system is operating optimally by having it regularly serviced can all improve your employees' well-being and your bottom line. Where possible, you can also try to offset your energy bills with green energy solutions such as solar panels or a heat pump. Grants and funding options may be available if this is outside of your business's budget. Look for solutions that can help you regulate the heating and ventilation within your commercial property throughout the year, especially if your building is affected by mold, condensation and dampness.

Mechanical airflow systems can aid in forcing airflow through a building, ensuring heat produced by computers and people can be controlled and prevented from building up. UV-protective paneling can be used to reduce solar glare, minimize overheating and increase privacy for your team.

Solar panels can generate both thermal energy and electricity to help offset the building's carbon footprint and reduce energy costs over time. An initial capital investment can be worthwhile over a longer period of time.

Air and ground source heat pumps can often be installed also to help offset grid reliance on hot water and heating systems.

Additionally, ensuring the insulation within a building is optimized prevents heat escape from occurring. This by itself helps maintain a more stable internal temperature for employees and systems; however, in my experience, it is a strategy that works best with an efficient heating system.

Lifestyle Benefits To Consider

Additional benefits to consider are offering shower facilities and bike racks to allow staff to cycle to work and exercise on their lunch break. You can also install electric recharge points to encourage the use of electric vehicles.

These can be worthwhile investments to increase employee participation and well-being; they can also help your business move the needle on sustainability.

Every building is different; new and more modern offices tend to include a range of sustainable solutions and BREEAM Excellent-rating-quality internal space and facilities. However, older buildings do not have to become something to avoid or become irrelevant. When they're upgraded, they can provide a sustainable and excellent home for your business to operate within an equally desirable environment as a modern building.

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IMAGES

Invoice Factoring Model
The Factoring Process
What is factoring? Definition and examples
Factoring Business Plan
Note on definition of factoring business
Factoring

COMMENTS

Factoring Company Business Plan [Sample Template]
Steps to Write a Factoring Company Business Plan 1. Executive Summary. Sherly Bentley© Factoring Company, Inc. is a factoring company that is based in Brooklyn, New York, and provides financial services to small and medium-sized businesses. We specialize in purchasing accounts receivable from companies and providing them with immediate cash to ...
A Guide To Factoring: A Growth Strategy For SMBs
Staffing agencies are great candidates for factoring. They have high upfront costs, payables due weekly and receivables that take 60-120 days to rotate. If an average account for the company has ...
How to Open a Factoring Company in 2023 [Business Plan]
Marketing promotion expenses for the grand opening of the factoring company for $3,500 and as well as flyer printing (2,000 flyers at $0.04 per copy) for the total amount of $3,580. The total cost for hiring a business consultant including writing a business plan - $2,500.
Starting Your Own Factoring Business? It's Your Call
Starting a Factoring Business. Those of us that own a business know that turning this dream into a reality takes a few steps. I promise not to make this article about writing a business plan or how to acquire capital from investors. That is not to say that either of these is not important if not crucial to getting a business off the ground.
Best of How To Start A Factoring Business
Here are three to jump-start your efforts: The Factoring Investor website is an excellent resource for learning about the factoring industry. There are great articles in the " Factoring 101 " category from a variety of industry experts with different points of view. Another top resource is the International Factoring Association.
Factoring Business Plan
This professional Factoring Business Plan includes sections germane to all Factors as well as a guideline to help you properly position your Company and strategy in the eyes of potential investors. It is designed to ensure that you cover all of the basics of a properly written Business Plan. It also helps you extract those things that make you ...
The #1 Factoring Business Plan Template & Guidebook
Starting a factoring business has never been easier. From writing a business plan to understanding the financials of your business, the #1 Factoring Business Plan Template & Guidebook provides an all-in-one resource to set you up for success. Get up and running fast with step-by-step guidance, sample plans, and expert advice - all in one place ...
A Guide to Factoring for Business: Unlocking Cash Flow Potential
Factoring is a financial arrangement that allows businesses to convert their accounts receivable invoices into immediate cash. In simple terms, it's a transaction where a business sells its unpaid invoices to a specialized finance company known as a "factor.". The factor then advances a significant portion of the invoice amount to the ...
Invoice Factoring: The Ultimate Guide for Small Businesses
This lender requires that you are able to factor at least $15,000 per month with them. Amounts: Up to $4 million per month; 90% of invoice amount. Fees: 0.5% to 3% for the first 30 days the invoice is outstanding—after 30 days, fees increase incrementally every 15 days and max out at 5%.
Factoring Startups Combo Business Plan / Projection and Budget
The Factoring Business Plan is an indispensable tool in obtaining the proper funding for your company. Factoring Projection and Budget Spreadsheets. FactorHelp has developed this easy to use Factoring Forecasting Model to assist you in preparing 3-year Projections or Budgets. These Interactive Spreadsheets allow you to change any and all of the ...
What Is Factoring and Is it Right for My Business?
Factoring is a unique type of cash advance financial service where companies can get money by trading their unpaid invoices to a factoring company or "factor," which then collects payment on the business's behalf. With factoring, instead of getting paid directly by your customers in the usual way, your company agrees to give your unpaid ...
Invoice Factoring Explained
Depending on whether you are bonded or not, the amount is 70% to 80% of the invoice's face value. 5. Collection and Payment. Once your client pays the invoice and contacts us letting us know the job is complete to their standards, we will send you the remaining 20 to 30% less our factoring fee.
Invoice Factoring: Is It Right For Your Business?
Invoice factoring is a business loan alternative that lets businesses sell their invoices to a third-party factoring company for a portion of the invoices upfront.
Invoice Factoring: What It Is and How It Works
How invoice factoring works. Step 1 You sell your invoice to a factoring company. Step 2 Factoring company advances you a percentage of your invoice amount. Step 3 Factoring company collects ...
International Factoring Association
Price: $1,195.00. Add To My Shopping Cart. If you are an entrepreneur or an experienced firm ready to take that next step in raising capital, FactorHelp offers a Factoring Business Plan template specifically written for the factoring industry. This professional Factoring Business Plan includes sections germane to all Factors as well as a ...
How to compare and work with invoice factoring companies
The fee typically ranges from 0.5 percent to 5 percent, though the structure is different for each factoring company. The fee is usually taken out of the invoice amount as a percentage. For ...
Factoring In Finance
Factoring In Finance Meaning. Factoring in finance is a source of immediate capital. It is acquired in exchange for accounts receivable. Hence, it is a financial arrangement between a financial institution (factor) and a small or medium-sized firm (client). A factor purchases trade debts or receivables from a client firm at a discounted price.
Factoring Industry Products
This professional Factoring Business Plan includes sections germane to all Factors, as well as a guideline to help you properly position your Company and strategy in the eyes of potential investors. Also included in this package are 3-year Budget and Projections for startups. These include initial, annual and monthly to ensure you have all of ...
International Factoring Association
The Factoring Business Plan is an indispensable tool in obtaining the proper funding for your company. If you are a Startup Factor, take the guesswork out of preparing Projections. If you are already in the Factoring Business, cut down the time it takes to prepare your yearly Budgets. These Interactive Spreadsheets allow you to change any and ...
Factoring
Factoring Definition: A financing method in which a business owner sells accounts receivable at a discount to a third-party funding source to raise capital. One of the oldest forms of business ...
Factoring Company Business Plan and SWOT Analysis
The Factoring Company Business Plan and Business Development toolkit features 18 different documents that you can use for capital raising or general business planning purposes. Our product line also features comprehensive information regarding to how to start a Factoring Company business. All business planning packages come with easy-to-use ...
Factoring (finance)
Factoring is a financial transaction and a type of debtor finance in which a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount. [1] [2] [3] A business will sometimes factor its receivable assets to meet its present and immediate cash needs.[4] [5] Forfaiting is a factoring arrangement used in international trade finance by exporters who ...
Invoice Factoring Guide
A typical factoring interaction might look like this: You sell an unpaid invoice with a value of $10,000 to a factor. The company advances you 85% (or $8,500) of the cost upfront and holds 15% (or $1,500) in reserve. When your customer pays, the factor will send you the reserve, minus a small fee.
Crafting a Winning Business Plan: 7 Key Elements for Success
These seven key elements will guide you through the process, ensuring your plan is comprehensive and compelling. 1. Executive Summary. The executive summary is your business plan's opening statement and should capture the essence of your company in a concise manner. It needs to succinctly outline your business mission, vision, and core values.
How to write an effective business plan
Forgetting your customer: Don't get so focused on the technical aspects of your business plan that you lose sight of the most important factor: the benefit to your customers. Develop your ...
Consider these money moves before the Fed cuts interest rates
Don't let stock market turmoil and a slowing economy scramble your planning as borrowing costs get set to fall, financial experts say.
Building And Work Experience Factors Often Missed In Business ...
Common Issues To Account For. As an entrepreneur and surveyor, I've found that some of the most common issues faced in today's offices include poor indoor air quality, black spot mold, overheating ...
7 Best Windows Password Managers of 2024
Best Windows Password Managers of 2024 Compare Best Windows Password Managers of 2024 Monthly Price Free Plan Two-Factor Authentication Device Limit 1Password Individual: $2.99 Families: $4.99 ...