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Small Business Invoice Factoring: What Is it and How Does it Work?

small business invoice factoring

If you’re a small business, you’re likely all too familiar with the net payment terms required by many of the other businesses you work with. This delay in payment can cause headaches for small business owners. No one wants to wait on invoices to be paid, least of all a growing business trying to manage their cash flow. 

Small business invoice factoring is one option that can help small businesses have more cash on hand and reduce their administrative load. This way you can easily put money you’ve already earned to work, covering expenses like payroll and supplies, as well as going after larger projects to help your business grow.

What Is Small Business Invoice Factoring?

Small business invoice factoring is a type of accounts receivable financing. How it works is you sell your unpaid invoices to a factoring company. In return, you receive the full value of the invoice (minus a fee) ahead of the original payment terms, which then lets you meet immediate business needs and any necessary revenue targets to keep the lights on and the doors open. Your customer then pays the factoring company according to the original net terms. 

Benefits of Invoice Factoring for Small Businesses

The main benefit of a small business factoring an invoice is that it helps solve the cash flow challenges that small businesses often face.

As a small business, you likely have limited resources to keep your business running – including working capital. To keep the wheels turning smoothly, having customers pay as soon as possible means you can continue without resorting to debt or giving away equity in your business. However, the problem is that customers don’t have to pay until invoices are due — usually somewhere between 30 and 90 days. This leaves you with outstanding invoices on your balance sheet. 

Small business invoice factoring is a financing option that shortens the wait time to get your invoices paid. With an invoice factoring service like FundThrough, any type of business can turn their outstanding invoices into cash in as little as a week – much faster than a bank! This means your business will have the necessary cash flow to grow and stay viable.

Invoice factoring can also give you:

  • Peace of mind. No more worrying about how to cover expenses.
  • Reduced administrative work. Eliminating the need to figure out how to cover expenses and managing accounts receivable gives you time back in your day.
  • Flexible funding. Get a working capital boost only when you need it without the months-long process – and rejection – of bank financing

Pros & Cons of Invoice Factoring

When considering invoice factoring for your small business, it’s important to weigh the pros and cons.

Pros of Invoice Factoring for Small Business

  • Easier and faster access to working capital: Traditionally, small businesses have relied on bank business loans, traditional loans, and lines of credit as a way to fill the cash flow gaps caused by unpredictable invoice payments. The difficulty is that banks usually have cumbersome paperwork requirements, and it can take several weeks or even months to get access to funds. However, FundThrough typically reviews small business invoice factoring applications and provides a cash advance within days. 
  • Healthy and predictable cash flow: Consistent cash flow is like oxygen to a business – vital for survival. Businesses need access to cash consistently to cover ongoing expenses and seize growth opportunities. Many businesses use factoring regularly as a reliable method of receiving upfront cash on customer invoices.
  • Productive use of resources: Unpaid invoices means someone has to chase down payment. Talk about a waste of time and resources! Invoice factoring saves you that headache, plus, you can save valuable time by connecting your accounting software. (FundThrough is fully integrated with QuickBooks and other popular accounting tools.)
  • Lesser risk: Most traditional financing solutions require the use of personal assets as collateral. With invoice factoring, your unpaid invoices are the only collateral. Plus, your personal or business credit score isn’t an issue.
  • More value: Unlike bank loans and lines of credit, factoring often includes additional services that can lower your overall administrative expenses. As part of their service, invoice factoring companies conduct credit analysis of your vendors – which they share with you. This saves you the cost of a professional credit analyst when onboarding them.

Cons of Invoice Factoring for Small Business

  • Cost: We won’t deny that on the surface, the cost of small business invoice factoring can be higher than a traditional bank loan. However, there is no application fee or any other hidden fees. Funding rates range between 1% to 6% per month or more— depending on the factoring company. Doing your research is key to understanding overall total costs, and that you’re working with the best invoice factoring company. At FundThrough, our AI-driven technology allows us to offer highly competitive invoice factoring rates
  • Record keeping. Some people find that accounting for factoring receivables can be tricky. We’ve broken down the process step by step for recording QuickBooks invoice factoring, to help reduce your admin load.

How Much Does Invoice Factoring Cost?

While we can’t speak for other companies, we offer transparent pricing. FundThrough’s fees vary between 2.5% – 7.5%, depending on your circumstances. 

With FundThrough, you only pay when you fund. There’s no cost to create an account, and no hidden fees. There’s also no minimum or maximum, and no long-term commitments once the invoice is paid. To get started, contact one of our experienced client success representatives.

How Does Small Business Factoring Work?

There are a few steps involved in the small business invoice factoring process, including: 

Step 1: Confirm that your business invoices other businesses, and that your invoice has net terms of 30 days or more. 

Step 2: See if you qualify (you can do that with FundThrough here) and set up an account. Review available funding options, rates, and send in required documentation. For validation purposes, you will be required to submit several business documents. Documents can include:

  • Business formation/ legal proof of business documents
  • Government-issued photo ID
  • Void check

Step 3: Submit your completed application for approval. 

Step 4:  Submit your invoices manually or by connecting to a supported invoicing software or accounting software.

Step 5:  Select the invoice you’d like to fund and submit it for review. This is when the factoring company will confirm the eligibility of the invoice. 

Step 6: Complete the steps for approval. 

Step 7: Funds are deposited to your account!

Learn More & Get Started

If you’re interested in learning more about small business invoice factoring, our Complete Guide to Invoice Factoring is chock full of information, and answers 45+ questions you might have about invoice factoring.

If you’re ready to get started invoice factoring in Canada and the United States, FundThrough can help. See if you qualify for our innovative funding solution.

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