Invoice funding

Don’t Sign an Invoice Factoring Contract Without Asking These Questions

As we’ve discussed in previous blog posts, invoice factoring is a type of accounts receivable financing that converts outstanding invoices — due within 90 days — into immediate cash for your small business.


But before you sign any type of contract or agreement for an invoice advance loan, it’s essential to ask the right questions to understand what services you’re getting for your money. If you’ve signed any contract before, you know that it doesn’t matter what was discussed; what matters are the terms you agreed to when signing at the bottom.

As a business owner, you sign a lot of documents, and it’s common to breeze past the fine print and take the sales person’s word for it. With that in mind, we’ve collected a few important questions to ask your invoice factoring company before signing a contract.

How long has the invoice factoring company been in business?

If a company has been around for a while, you can typically trust that they’re not going to close shop and disappear with your money. And when you’re trusting your invoicing and collections to a third party, it’s important to partner with a company that has the necessary experience, structure and team to handle your business.

Remember: invoice factoring companies become an extension of your business and work on your behalf to invoice and collect from your clients. This relationship requires professionalism, respect and a high-level understanding of different industries. These skills are not learned in a day of training. They are part of a company culture that puts an emphasis on customer-first service.

It’s important to mention that years in business don’t always translate to success. But if a company has been around for a while, you know that it’s survived economic downturns in the past and can likely weather ones in the future as well.

How are the fees structured?
Each and every funding company structures their fees and finances differently, so it’s absolutely vital to make sure you understand every word of the contract when it comes to the way your business will be charged and paid.

Invoice factoring companies offer different funding products based on industry, size and growth goals. Some things that might affect your factoring fees:

  • Length of contract
    • It shouldn’t be surprising to learn that the longer you sign up for a service, the less your fees will be. Invoice factoring is no different. Most companies offer month-to-month, 6-month and year-long contracts. If you’ve never used an invoice factoring service before, it might make sense to start with a month-to-month and then upgrade to a longer-term deal and save some money.

  • Type of product
    • Invoice factoring has different options for different business types, but the two most common are recourse and non-recourse. Recourse factoring tends to be cheaper because the client assumes the risk of non-payment. For example, if your client fails to pay back the agreed upon amount because they went bankrupt, the factoring company will charge that back to you. Recourse is a great program if you have established clients who pay on time.

For startups and less established businesses, a non-recourse agreement might make more sense. In this arrangement, the factoring company takes on all the risk of non-payment if the business goes bankrupt. So even if your client doesn’t pay, the factoring company will not charge back the unpaid invoice. The fees associated with this product might be a little bit more, but it also provides you with more confidence and peace of mind.

Regardless of product or type, you need to know how the fees are structured. When you get your contract, read it again and again until you come away confident knowing what it says. Once you sign, you’re not likely to be able to make changes.

According to the Wall Street Journal, “The factor advances most of the invoice amount … after checking out the credit-worthiness of the billed customer. When the bill is paid, the factor remits the balance, minus a transaction (or factoring) fee.”

Again, each company is different, so take all the time you need to ensure you understand your financial obligations.

Are they committed to excellence? 

You work hard to make a name for yourself and to set your business apart from your competition. Wouldn’t you want to work with an invoice factoring company that has the same goals?

The fact is, industries change. Business models should be constantly reevaluated and tweaked to better serve the customer.  In today’s world, you need a business partner that exercises a high degree of flexibility and is able and willing to adapt with the times.  Look for a factor that’s a pioneer in their space and is constantly looking to add more value to your business.

Can the invoice factoring company help to grow your business?

The answer to this should almost always be ‘yes.’ At a minimum, an invoice factoring company should be providing your small business with the immediate cash flow it needs to grow and evolve to reach its full potential.

Many factoring companies have industry partnerships and referral partners that offer products and services that can you can take advantage of at a discount. Be sure to ask the factoring company if they have existing relationships with other businesses that you can leverage for your business.

All of this boils down to the factoring company taking an interest in your business’s long-term success.

Ask yourself, “Do they care about my business? Or, do they just want my money?” Every company has to make money. Otherwise, they cease to exist and can’t help anyone. But, if they’re committed to the success of your business, they’ll take the approach that if you don’t succeed, they won’t succeed either. Choose a factor that is knowledgeable and passionate about your industry and theirs. In return, they’ll be passionate about your business.


Get Started with Triumph Business Capital

Ultimately, keeping these questions in mind can help you scope out the best invoice factoring business and contract. For more information about invoice factoring or invoice funding, contact Triumph Business Capital.