Non Bank Invoice Factoring

How to do invoice factoring

a guide on how it works

Non bank Invoice factoring is an effective to finance your business account receivables so your outstanding (future) invoices due in a maximum of 90 days become cash so you can use for your SME (small to medium sized business). The firm doing the factoring will normally pay in 2 portions: a cash advance of about 80% of your the invoice and the remaining 20 percent once the invoice is fully paid in full (minus fees).

In this document we will talk about how invoice factoring works, both for non bank and its bank versions. We will also talk a bit about invoice factoring costs. how to get approved and we will also talk about how to best choose a factoring partner that will fit your needs. We will touch on the differences separating invoice financing & invoice factoring and what is the best option for you. Finally, we will talk about what are the options for you depending on the country you are and we will focus on USA and European companies only (for now).

The reason we are writing this is because with a virtual bank account by B2B Pay we will soon be able to offer factoring on your balances which means that not only you will get paid like a local business in the EU but also you will be able to maximise your working capital. Another reason is that we have factoring partners that you can find out more about by contacting us.

Invoice factoring in Germany

Invoice factoring for mittelstand

There are multiple companies that serve Germany's factory market which pushes upwards of 200 billion Euros in transactions every year. Below is a short list of companies that we believe are some of the key players that would best serve your german business. Remember that in order to work with any of these companies you must have a German registered company and address.

  • These are freelancer and self-employed specialists being one of the fastest growing invoice factoring in Germany startups. Setup time is only 5 minutes and you do all of it online: upload your invoice and get paid in 24 hours or less.
  • This is a finance portal for german small companies also known as Mittelstand and with 220 finance partners to choose from, they could be a great option for your invoice factoring in Germany.
  • This is a factoring specialist that claims to be easy, fast and secure way for invoice factoring in Germany, with a list of advantages such as high flexibility, low fees and insurance against loss.
  • Decimo is the freelancer and self-employed invoice factoring for Germans. They also work with small and medium companies and have free online registration and claim to prove you with liquidity in 24 hours. Decimo has simple signup with minimum paperwork and no contract.
  • This is a startup in the market of invoice factoring in Germany. They have low fees, 5 minute registration and the payout is in 24 hours. Also, without a binding contract you can cancel your factoring deal with them at anytime.
  • Svea is one of the more experience players in this market and offers invoice factoring in Germany as well as debt-collection services for companies. Their invoice factoring offer is flexible, tailored to your business needs however large or small.

What is invoice factoring, after all?

Non bank invoice factoring for all companies

Invoice factoring is a type of financing that is only available for B2B or B2G, in other words, for businesses invoicing other businesses and for businesses invoicing governments. It advantage for an SME is that is give you more financial freedom because of the availability of working capital in the short term. This happens because your business exchanges (sell) invoices to a factor. This factor gives you a cash advance on your invoice with an initial instalment of 80% of the invoice value. Once the payment is done, the factor pays the remaining 20 percent minus all fees.

Despite being similar, invoice factoring has not much to do with invoice financing, also known as accounts receivable financing even though these terms are commonly mixed up. Invoice financing is much simpler and easier to use and the major difference is that it does not require that you assign individual invoices in the way that happens with factoring.

Additionally, it is possible to do factoring on consumer invoices as well (B2C). If you do not work with invoices there are other options available in the market such as short term loans and what is known as the merchant cash advance.

This is a great solution for short-term cash flow issues and it is also used as a tool for simplifying the conversion of cash flow for any small business. With this said, this is not the route taken for any large capital investments because these are done with SBA loans (long term loans).

How does invoice factoring work?

There are 5 steps in all invoice factoring:

  • Invoice the client with “net terms” of 30 to 90 days
  • Sell & assign the invoice to a factoring company
  • The factor does the cash advance of about 80% of the invoice
  • The client pays the factor upon invoice due
  • The client pays the factor upon invoice due
  • Factor pays remaining 10 percent minus fees

Invoice factoring step 1: invoice the customer

Products or services are usually tied to an invoice that you issue to your B2B or government customer. In order for them to be suitable for factoring they must be payable in no more than 90 days.

Invoice factoring step 2: sell the invoice to a factoring company

What happens is simple: find a factoring company, get approved through their application process & then sell the invoices. Upon submission of an invoice to a factoring company these are the expected results of the interaction.

First, it is the factoring company that determines if you are an eligible client and is able to receive financing. Due diligence will be conducted on your customers to find out their credit risk. If the factoring company approves your business you will sign an agreement. This initial agreement will include stipulations on the initial maximum allowed dollar amount you may borrow which is usually the max “factored” amount at any time.

Invoice factoring step 3: the factoring company advances you cash

The factoring company pays you the initial cash amount which is called the “advance rate” which is - normally - about 80% of the total value of the factored invoice. The actual total amount of this advance will depend of the total size of the transaction, its risk parameters and the industry type.

In some cases, the factoring company may send an assignment notice to your clients (those in the invoices you sold) and this may be a requirement of your clients in some cases. This document says that you have chosen a factoring company to receive all future payments related to said invoices. Payments go to a "lockbox account which is a designated account where all invoices are to be paid).

Factoring is a very common endeavour in some industries and as such, telling your client you sold their invoices to a factoring company may not be a problem. If this is not common practice in your field of business, invoice financing might be an option.

Invoice factoring step 4: your client pays the factoring company

Your client pays the factoring company within ninety days, according to the terms listed on the invoice.

Invoice factoring step 5: factoring company pays you the remaining cash minus all fees

After having received payment, the factoring company (factor) will pay you the invoice remaining balance which is called "reserve amount" only subtracting their fees.

As a student, for instance, some banks will gladly accept a letter from your university’s admissions office confirming your address.

Invoice factoring: costs & requirements

Non bank invoice factoring for all companies

As mentioned earlier, invoice factoring is a good option for businesses seeking working capital and as long as you have invoices that fall within criteria you should be able to work with a factor. Even if you are a startup, it is possible to factor invoices. Below are the normal costs involved in factoring and although these can be a bit complicated to understand, most fall within the ranges stated as following:

  • Amount available for borrowing: 10K or more per month
  • Time to get approved: 2-8 days
  • Time to receive cash payment: 1-3 business days
  • Requirements for qualification: 90 day payable and free of liens of any type.
  • Other qualifiers: B2B or government customers. No legal or tax problems. 2 years or more in business.
  • Required documentation: Application with basic information (business & personal), accounts receivable "aging" report, account payable "aging" report, tax returns, incorporation documents
  • Fee: .5 to 5%
  • Advance: 80% of total
  • Other fees: varies by factoring company

All factoring companies and lending offers are different with some specializing in working with invoices due in 90 to 120 days and other working in larger or smaller limits. If you require more information about a factoring partner, please contact us. If you are a B2B Pay client, you will not have to sign up again and application will be easier. Creating accounts is always free.

How to get qualified for invoice factoring

Non bank invoice factoring for all companies

It is certainly easier to get qualified for invoice factoring than it is to get qualified for any type of long term financing such as commercial real estate loans. In all other types of financing offers, credit scores, revenues and your company's profitability are taken into account to approve a loan. Most factoring companies take into consideration these three criteria:

  • You must be invoicing business or government customers. Your customers must have proper credit rating and also must be businesses that are established in their fields. This means that the factoring company must trust that your customers will pay.
  • All invoices have to be due (and payable) in 90 days or less and detached from any other loan or financial obligation (such as using an invoice as collateral on another loan)
  • There should be no serious history of tax or legal issues.

Some factoring companies will have more requirements such as a decent credit rating or minimum time in operation. However, these are usually lighter in comparison to other lenders. Just so you know, it is still possible to qualify for invoice factoring if you are working directly with consumers and some companies will qualify you. Get in touch with us to see if you qualify.

Costs of invoice factoring

Non bank invoice factoring for all companies

The minimum costs - excluding any additional fees - charged by a factoring company depends on the following:

  • Discount rate (also known as factor rate): the discount rate is the main cost in invoice factoring and this is typically charged weekly or monthly. In this industry rates vary between .5 and 5% of the total invoice/month. Some invoice factoring companies tier down their discounts so the more you work with them the better deal you get with them.
  • Length of factoring (the amount of time your customer takes to pay): since discount rates are charged in fixed intervals (typically every week or month), the amount of time that your customer takes to pay the invoice influences the final cost.

Example of invoice factoring costs

Let's break down these invoice factoring costs a bit more with an example. Say you factor a 10 thousand Euros invoice, advance rate being 80% and discount rate being 3%. In this case. You will get paid 8000 in advance. If the client pays in full in 30 days, you will receive 1700 euros totalling 9700 euros. The 300 euros that remain are the fee charged by the factoring company.

Invoice factoring: one easy example

  • Step 1: you invoice your client for 10k, 30 days to pay
  • Step2: Sell invoice to factoring company, 3% discount rate
  • Step 3: You receive 80% of the total: 8K
  • Step 4: Client pays factoring company in 30 days
  • Step 5: Factoring company keeps 3% as their fee (300 euros) and pays you the remaining money.

Additional fees that you need to be aware of

Non bank invoice factoring for all companies

There are invoice factoring companies that charge hidden fees! It is important to read the fine print and do your research.

  • Origination fees: all costs associated with opening an account and starting doing transactions. Sometimes companies charge upwards of 1000 euros.
  • Incremental fees: If you have a flat fee deal with your factoring company, you may be charge a fee to increase the total discount as the invoice "ages". This can be between 0.3 to 1%.
  • Service fee (lockbox fee): this is a fee charged to keep your money in a "lockbox" - that is- in a designated special account. It can be up to 500 per month.
  • Unused line fee: If you do not take advantage of the credit line, they may charge you between 01 and .5%.
  • Monthly minimum: there could be a minimum fee that you must pay every month, sometimes reaching upwards of 1000 euros.
  • Service fee (lockbox fee): this is a fee charged to keep your money in a "lockbox" - that is- in a designated special account. It can be up to 500 per month.
  • Collection or 'overdue fees": companies may charge you if your client does not pay in time and fees can be in the thousands.
  • Wire fees: if you request to be paid via a wire transfer, factoring companies charge 15-50 euros.
  • Credit check fee: fees vary, but whatever credit checks that will be required to be paid by you.

It is likely that you will pay some of these fees in one way or another and therefore it is important to get informed:

  • Ask your factoring partner to give you a list breaking down all fees. Something simple and easy to read.
  • Read the contract. Carefully. Get legal help if needed.
  • Compare all proposals. Shopping around is important.

There are companies that are much easier to work with than others, so it is important to do your research and be well informed. Some have instructional videos and detailed information and well thought out customer onboarding processes that make the whole process rather easy. In some, you won't be required to run a credit check which means you are more likely to qualify quickly - sometimes in a few hours.

APR compared to total cost of capital

Non bank invoice factoring for all companies

If you are accustomed to measuring costs & fees of invoice factoring as Annual Percentage Rate it may end up looking a bit higher than usual.

With short term financing options, which is the case of invoice factoring, the total cost of capital is usually more important than the APR. What is total cost of capital? This is how much you it will cost in fees during the life of the loan.

In long term financing - for example - has APR of 7 or 8%, short term solutions range much higher from between 30 and 120 percent. Invoice factoring normally falls in the middle with APRs ranging between 30 and 60%.

Bear in mind that measuring the .5-1% APR of invoice factoring to that of traditional financing can be highly misleading. This is the case because the loan is short term so rates seem small.

So, imagine that you borrowed 20K from a factoring company for 30 days with a 1% weekly rate. The total cost would be 400 euros despite the APR being 52%. However, if you borrow this money and have a payment schedule over 5 years at 7% a year the total cost of capital would balloon to almost 1900 euros.

Choosing the perfect invoice factoring company for you.

Non bank invoice factoring for all companies

There are thousands of invoice factoring companies in the world, with a large variety of financing offers fit for all business types. It is important to be careful when choosing a company and here are a few pointers that will help you decide.

Customer contact with factoring company.

One important aspect of invoice factoring companies is the fear that invoice customers will get a lot of contact requests from them asking to pay their invoices and that hard earned business will be scared away. These concerns are real but they are largely exaggerated and need to be addressed.

Some factoring companies will want to talk directly with your customers in order to verify invoices and to make arrangements for payment. This is - however - only common in industries where factoring is itself common so business relationships tend to be preserved.

With some companies there are special arrangements where the factor has nearly zero (and in some cases zero) contact with customers. In some situations this is possible by opening a bank account that is controlled by the factoring company but it is listed as your company's account. This means that your customer will think they will be in touch with your billing department.

The time to get your hand on the funding

Sometimes getting the money fast is a much bigger priority to you if your immediate financial needs aren't being met such as in with payroll or other essentials.

The timeframe for you to get your hands on the money is similar to that of short term financing but it does vary between factoring companies. You may get qualified in as little as 2 days and get the money within the next 24 hours. Generally speaking this process takes up to 2 weeks.

There are companies that makes this process faster because they require less paperwork and their approval systems are electronic and money can be in your hands in a day. Get in touch with us to learn more.

Recourse vs non-recourse

This is a key concept that needs to be understood by anyone looking to choose between factoring companies: recourse versus non-recourse factoring. This is what determines what happens if customers are late with their payments.

In recourse factoring, the factoring company has complete rights to collect their payment from you if the customer does not pay in a reasonable timeframe. This of course can be a problem if you already used the funds received from the factoring company. This is why it is important to only factor those invoices stemming from customers that are good payers. It is important to know this because fees can pile up and created an additional problem.

Non-recourse is different. This is when the factoring company takes on itself the risk of non-payment customers. In such cases, your business will not be liable for the unpaid invoices. It is important to pay attention to the fine print in such cases because despite advertisements claiming non-recourse factoring there are numerous exceptions listed in the contract.

There are also partial-recourse contracts and in any case all forms of factoring contracts need to be signed with care so you know who is responsible for what when payments aren't fulfilled.

Spot versus contract factoring

Spot factoring means: single invoice assigned to a single factoring company. Although this might be the first choice by many companies, some prefer not to factor with this method. Because the application and underwriting processes aren't too different, some view as being easier - and more profitable - to factor all of your invoices.

Contract factoring is much more common because it has minimum monthly requirements or that all invoices coming from a single customer must be invoiced. In general, this is something you must be aware of because long term contracts can be a cash pit and you must thread this waters with care. In other words, you may get better rates but gone is the flexibility because you have no way to choose the who/when/how of the factoring according to the ever changing financial scenario of a business.

Familiarity with the industry

Sometimes, understanding the underpinnings of your specific industry is a key component of what factoring company is best for you. Therefore it is important to take into consideration if the company has experience working with your industry specially if it specialises in it. Makes sure any claims being made are legitimate.

Invoice factoring versus invoice financing

Non bank invoice factoring for all companies

AR or invoice financing is a technology finance solution that is a simple way to resolve cash flow issues by advancing payments for outstanding invoices. It does not require sale of invoices and there is no interaction between a third party and the customer. This makes things faster and easier.

Here are the steps invoice in invoice financing:

  • Step 1: create account and sync your accounting software
  • Step 2: select which invoices you want to pay
  • Step 3: the invoice financing company pays 100% of the invoice
  • Step 4: you repay the company over the established period of time.

If you are looking for the easiest and fastest way to get your hands on working capital, there are many companies that will do this. Some companies offer rates as low as .5% and may lend amounts in the hundreds of thousands.

Remember that invoice factoring and financing are different things. Let's take a closer look at both options side by side:

  • Amount you are able to borrow: for invoice financing usually up to 100k and for Invoice factoring up to 10 million
  • Advance rate: for invoice financing it is 100% and for invoice factoring it is up to 80%
  • Qualified in: for invoice financing it happens in hours and for invoice factoring it happens in up to 7 days
  • Documentation: for invoice financing it is all through an online application and for invoice factoring you get a complex application which requires company and personal documentation
  • Assigned invoices: for invoice financing there is none of it and for invoice factoring the answer is yes.
  • Contacts customers: in invoice financing the answer is no and in invoice factoring the answer is yes.

When to use invoice factoring

Non bank invoice factoring for all companies

This is the right option for your company if you need constant cash flow and if you invoice B2B or governments. You must be thinking long term because often invoice factoring companies require a long term contract. A few more characteristics that may help you make a decision in favour of factoring:

  • This is a long term relationship and you will be in touch with the company on a weekly basis. You will be working together to do factoring on new invoices, in collection and repayment. They may help you in simplifying this process.
  • Your customers' credit history is very important and you will be relying on them for the relationship to thrive. For example, if you are low on cash right now and you are relying on credit card over a slow season (and your credit rating took a hit) but soon will need to have your credit score higher in order to get a traditional loans, factoring may help.

Invoice financing is simply better if you need to short-term cash flow of need short-term growth capital. You may also consider it if you need the following from your invoice loan option:

  • Speed: invoice financing is much faster and you get your hands on cash in as little as one business day. No need to worry about assignment notices for example.
  • Flexibility: no long term contracts and you don't need to agree to factor all the invoices from one customer. For example, if you are in need to get cash to run your business for the next 3 weeks, simply finance one invoice that matches your expenses.
  • Easier: you qualify faster and online and thanks to quality onboarding processes application are dealt with in a matter of hours.
  • No more hidden fees: You pay back invoices in weekly payments broken down typically in 12 or 24 weeks and usually you also pay a small fee. In contract terms there aren't any other fees. It is therefore rather easy to determine what you will be paying weekly before you make a decision.
  • No direct contact with customers. Since there is no assigned invoices to specific providers, there is no need to be worried about your customers being hassled by a third party.

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In Summary

Non bank invoice factoring for all companies

Factoring can appear to be a complicated process in comparison to bank loans. What is interesting is that what makes it complicated is also what makes it a good option for certain business scenarios. You can borrow cash based on unpaid invoices to get your business going right away and as long as you choose your clients wisely and these pay on time this is the more affordable option.

Invoice financing, on the other hand, is about short term small loans. Rates are rather low (usually .5% a week) and repaying is periodical depending on the firm. It is in a way like getting paid in cash every time you invoice a customer, so there is no more waiting. With a lot of companies, once you are approved and your accounting software is synced, just pick an invoice to clear and money will be in your hands in a day.


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