Do banks factor invoices?
Are you looking into where you can get unpaid invoices factored or otherwise researching your options for invoice factoring? You might be wondering do banks factor invoices? Yes, some banks factor invoices. But why is it that some factor and some don’t? Should you factor unpaid invoices with a bank? We’ll answer your questions and help you decide if bank factoring is the best option for your business.
Invoice Factoring: What it Is and How it Works
Before we go further, let’s go over a quick explanation of what invoice factoring is and how it works. Invoice factoring is a form of financing where a business owner sells outstanding invoices (or accounts receivable) to a factoring company for quick access to funds. The business owner receives cash for the invoice amount, less a factoring fee, ahead of the payment terms. The business owner’s customer, who is responsible for paying the outstanding invoice, instead pays the original invoice amount to the invoice factoring provider according to the original payment terms, after which the factoring process is complete. Invoice factoring also goes by the terms accounts receivable factoring, supply chain financing, or receivable financing.
In addition, there are two main types of invoice factoring in banking to consider when weighing your options — factoring without recourse or factoring with recourse.
Briefly, factoring with recourse means if your customer fails to pay to the factoring business, you’re on the hook for the unpaid invoice. With non-recourse factoring, the key difference is that the factoring company accepts any loss resulting from non-payment. Basically, you’re not obligated to pay the invoice back in the unlikely event that your slow-paying customer doesn’t pay the invoice.
The Reasons Why Banks Do - Or Don't - Factor Invoices
Banks may factor invoices for a number of reasons, but the main purpose is to provide financing to businesses that need working capital. For banks, funding invoices can be a way to generate income from lending to businesses without taking on the risks associated with traditional lending. Additionally, factoring can provide banks with a way to build relationships with small and medium-sized businesses that may be seeking other banking services, such as loans or lines of credit, in the future. Some other reasons banks factor invoices include:
- They already have access to capital.
- They recognize their SMB clients can’t qualify for traditional financing.
- They want their SMB clients to grow with them, so eventually they will qualify for traditional financing.
- They’ve partnered with a factoring firm that makes it easy to offer SMB clients an alternative source of working capital.
However, more banks don’t factor invoices, often for these reasons:
- Factoring requires specific expertise and talent that can be expensive and difficult to source.
- Factoring requires specific operations that can be time-consuming to set up.
- The banks typical customers wouldn’t use factoring.
Pros and Cons of Factoring With Banks
Like any source of funding, there are advantages and disadvantages to factoring with banks. Here are the pros and cons of funding invoices with banks, to help you make an informed decision about whether factoring with a bank is the right financing option for your business:
- Direct access to capital
- Can offer multiple financial products
- Under government regulation
- Less people and resources dedicated to invoice finance platform and product
- Manual processes that create inefficiencies
- Hidden fees like application fees and transaction fees
- Advance rates up to 95%
Pros and Cons of Factoring With a Dedicated Factoring Company
While a factoring arrangement with a dedicated factoring business can provide you with a range of benefits, such as higher advance rates and improved credit management, there are a couple of potential downsides to consider.
- Fast, flexible access to a source of funds
- Technology-backed factoring process and online applications eliminate paperwork
- Online invoice finance platform
- Often integrated with popular accounting software
- Unlimited funding (FundThrough only)
- Advance rates up to 100%
- No hidden fees (depending on company)
- Dedicated partner
- Cost of capital built into discount rate. (Reminder: The discount rate is also known as the invoice factoring rate. It is the amount of money that the factoring company withholds from the eligible invoice total as their payment for advancing cash and waiting to get paid for you.)
- Not regulated
Banks That Factor Invoices
Many banks offer factoring services to their business customers as a financing option. Some factoring banks include:
- altLINE (part of The Southern Bank Company)
- Wells Fargo
- JPMorgan Chase
- Fifth Third Bank
- Citi Bank
The Bottom Line
As you can see, banks factor invoice payments, and they might even be a good choice for your business if you’re looking to secure traditional bank financing in the future. That said, from our experience, your best bet to get the most benefit out of factoring possible would still be to go with a dedicated factoring partner.
Bonus: 6 Reasons why Invoice Factoring Is Better than Bank Loans
While the process for getting bank financing can be long and difficult, business loans and lines of credit have a place in a thoughtful financial strategy. It’s no secret that a line of credit is a convenient, low cost source of financing. Our CEO even wrote an article about why you should get a line of credit – if you can qualify.
That point is why business factoring (or invoice financing) is better than bank loans for so many small, growing businesses. Oftentimes, our small business clients have told us that they don’t yet have the financial documentation or annual revenue the bank wants to see, or they can’t wait the 3-to-6 months it’ll take to get approved. Sometimes, the bank doesn’t want to talk at all.
For those without adequate business credit history, receivables financing has become a reliable source of working capital because it’s as convenient as a line of credit while providing quick access to cash. But those aren’t the only reasons.
Here are 6 more reasons why many business owners prefer invoice factoring to bank loans when considering their business financing options, and why you might, too.
1. Quick and Convenient
Bank financing options have very strict requirements in terms of credit scores and require tons of paperwork, often making the loan approval process a complex and lengthy one. It can take up to several months for the bank to make its decision. Worse yet, after all that time, the loan may not even go through – leaving you at square one to get cash. It’s a stressful situation if you need a source of cash quickly.
In the case of invoice financing, the approval process is fast (via an online application) and the invoice factoring agreement is simple. As soon as your customer verifies that the invoice is real for the factoring company and confirms that they will redirect payment, you can get a cash advance in as quickly as a few business days, or even 24 hours.
2. Improved Cash Flow
If you can’t qualify for traditional loans or lines of credit, but need a boost to your business finances, invoice factoring provides a predictable source of cash and flexible solution to financing needs. While many traditional invoice factoring required business owners to fund a minimum number or dollar amount of invoices, newer factors allow you to choose which invoices you want to fund (even just a single invoice) whenever you want to fund, providing payment in a matter of a few business days.
Factoring for cash flow creates greater liquidity, allowing businesses to cover their expenses (like payroll, buying in bulk, or expanding operations) in a timely manner and use the additional working capital to take advantage of more opportunities to help the business grow and profit. And all without creating debt, as we’ll discuss next.
3. No Long-Term Debt
By far one of the best reasons invoice financing is better than bank loans is that no debt is created. Since you’re only leveraging the collection of future invoices (resulting in an increased cash balance and a reduced accounts receivable balance), you won’t have the burden of needing to repay loans.By far one of the best reasons invoice factoring is a better funding option than bank loans is that it doesn’t create debt. Since you’re only leveraging the collection of a future customer payment (resulting in an increased cash balance and a reduced accounts receivable balance), you won’t have the burden of needing to make monthly payments on a loan. Invoice factoring doesn’t weigh on your balance sheet or on your mind, enabling you to focus on your business.
4. No Caps or Limitations
Banks loans and credit cards have a maximum amount that can be borrowed. Once you’ve reached the limit you’ve been approved for, you’ll have to go through the application process all over again if you need additional source of funds. Look for an invoice financing company that can give you unlimited capital if you qualify, making the amount of cash available through invoice factoring directly related to your sales volume. The more sales you close, the more invoices you’ll be able to factor. As your business and sales volume grows, you’ll have access to even more cash through your receivables. When you have a big opportunity that comes you way requiring cash to pay upfront costs, you’ll be able to take it on without worry.
5. More Cost Effective
Although bank financing like lines of credit and credit cards are typically less expensive, the cost of invoice factoring includes a number of additional services that can reduce your administrative costs, or simply add value for you. Many of the best invoice factoring companies complete credit checks of your customers, determine credit limits for them, and collect receivables. By having these tasks done elsewhere, you have more time back in your day to focus on your business instead of doing admin work like chasing down a late payment or doing payment collection and invoice processing. (Always make sure any factoring company or factoring services you’re considering doesn’t charge hidden factoring fees or an unnecessary service fee that will drive up your invoice factoring cost. Also make sure they treat your customer relationships with the utmost care.)
6. Drives Growth
One of the top reasons small businesses turn to invoice factoring services is because they are growing – and growing requires cash to pay your current expenses along with expenses for large projects or more customers. Invoice factoring speeds up cash flow so that you can have that cash whenever you have a chance to grow.
Is Invoice Financing the Better Choice for Your Business?
Bank loans may be preferable for businesses with the financials necessary to qualify for bank financing. But for the many businesses that don’t have bad debt or a credit rating that qualifies them for bank loans or credit cards, working with an invoice factoring provider for accounts receivable financing is a convenient option.
Invoice factoring is a smart choice for B2B business owners who need capital and are optimistic about their business’ growth potential. By enabling you to turn invoices into cash, this alternative lending practice provides liquidity without adding debt or making you give up any equity in your business.
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Get started by creating a free FundThrough account, or connecting your QuickBooks, OpenInvoice, or WorkBench accounting software to start funding an invoice.