Online Invoice Factoring: A Simple Guide
Online invoice factoring services have become very popular over the last few years because it allows companies to access working capital without having to wait for customers to pay them. You can also complete and submit your application from anywhere, without the hassle of having to make an appointment at a traditional bank in order to secure speedy funding for your business.
You might be wondering why you should consider online invoice factoring. Let’s take a look at what exactly online invoice factoring is, some reasons why you might consider invoice factoring services, and how to go about finding the right online factoring company for your particular needs.
What Is Online Invoice Factoring?
Online invoice factoring is a form of financing where a business owner sells unpaid invoices to a factor company for fast access to funds. The business owner receives cash for the invoice amount, usually less any fees, ahead of the invoice payment terms. The business owner’s customer, who is responsible for paying the invoice, instead pays the invoice amount to the factoring company according to the original invoice payment terms.
Invoice factoring is also known as accounts receivable financing, asset-based lending, or accounts receivable factoring. It is different from invoice financing, which is where a factoring company still gives a business owner quick access to cash for their invoice, but the business owner pays back the invoice amount themselves, plus a fee. Find out how to choose between invoice factoring vs invoice financing.
How does online invoice factoring work?
Every online factor company, business, and their customers are different, so these steps are generalized accordingly. This is more or less what you can expect when you factor an invoice.
- Sign up for a free account online. The first step for online invoice factoring is to sign up for an account on the factoring company’s website. You’ll need to submit some basic information about your business as well as your banking information (for deposits).
- Submit outstanding invoices for funding. Traditional invoice factoring companies often require a business to factor all their invoices for the duration of a contract. With many newer, online companies, you can choose which invoices you want to fund. With FundThrough, you pick which invoices to fund with no maximum amounts, and no long-term contracts.
- Factoring company does due diligence. Oftentimes this will include checking that a business is legally established, is up-to-date on taxes, and doesn’t have liens on their accounts receivable and/or the specific invoice. (Many online invoice financing companies will find ways to work with businesses if they have these issues.) During this step, the factoring company will also verify that the invoice is real.
- The business’ customer is asked to sign an NOA. Having the customer owing the invoice sign a Notice of Assignment means they understand that the factoring company now owns the invoice so they can redirect payment. While a lot of business owners get concerned about their customers being involved, many large companies are used to this process. See: How We Work With Your Customers for more information.
- The business owner gets funded. The business owner receives cash in their bank account, less a fee (or, the invoice factoring cost). They can now have peace of mind that they have cash available to grow their business or cover any other cash flow gap.
- The customer pays the factoring company according to the invoice terms. When the invoice is due, the customer payment is sent directly to the factoring company, and the funding process is complete.
Types of online invoice factoring
There are a couple of different ways online invoice factoring is classified, depending on the type of arrangement you have and the type of service you’re using. The first is based on how you use factoring:
1. Whole turnover: You sell your invoices to a third-party that advances you a percentage (typically 70-80%) and pays you the rest, minus their service charge, when they collect from your client.
2. Selective: You have an ongoing relationship with the third-party factoring company that allows you to choose which invoices to fund and when.
3. Spot factoring: You need to access funds from an invoice factor infrequently but as quickly as possible to cover any gaps in cash flow.
The second way an online invoice factoring arrangement is classified refers to the structure of your factoring agreement with the factoring company:
1. Factoring with recourse: When you factor with recourse, you are responsible for paying back the cash advance even if the invoice remains unpaid to the factoring company.
2. Factoring without recourse: With non-recourse factoring, the liability of an unpaid invoice transfers to the factoring company. This means you are not responsible for unpaid invoices.
What are online invoice factoring rates?
Pros and Cons of Online Invoice Factoring
As with all things in business, there are pros and cons associated with online factoring. Knowing the upside and downside will help you make an informed decision about whether online factoring is right for your business.
Advantages of online invoice factoring
There are a wide variety of benefits of invoice factoring, including:
- Debt-free funding (invoice factoring is not a loan!)
- Non-dilutive capital.
- Unlimited access to capital.
- Much faster turnaround time than business bank financing.
- Save time without having to chase accounts receivable.
- Business credit score is less important (approval is based on your customers’ creditworthiness.)
- Time in business requirements are less strict than traditional business loans or other bank financing.
Disadvantages of online invoice factoring
Like any financing method, factoring isn’t perfect. Here are the main perceived disadvantages of factoring invoices:
- Invoices need to be verified, so customer contact is sometimes required. (See how we work to maintain your relationships with customers if this worries you.)
- Can be complicated to account for in bookkeeping. (Here’s how to record factoring transactions, step by step.)
- Some factoring companies charge hidden fees, such as a service fee or minimum volume fee. At FundThrough, we don’t charge any hidden fees. See our pricing page for more on what you can expect to pay for invoice funding.
Get more info on invoice factoring advantages and disadvantages.
Who Should Apply for Online Invoice Factoring?
An online invoice factoring arrangement is a viable option for businesses of all kinds and sizes – it’s not reserved for one specific industry. It can help businesses cover everyday expenses such as payroll, purchase supplies to take on large projects, or simply cover any funding gaps. Small businesses use online invoice factoring, as well as larger corporations. Factoring is a common practice in the staffing industry, oil and gas industry, and other industries. If you want to unlock consistent cash flow for work you’ve already done that’s tied up in slow receivables, online invoice factoring is likely a good fit for your business.
How to Choose the Best Online Invoice Factoring Company
The best online factoring company gives you access to quick, convenient funding when you need it, with a transparent fee structure that’s easy to understand. There are a number of online factoring companies to choose from, so it’s important to compare your options to ensure you’re getting the right fit for your unique situation, and that your factoring experience is seamless.
You’ll also want to look for a partner that can scale with you as you grow your business, with the necessary capital, staff, and infrastructure in place. Also consider if they have experience in your specific industry. Different verticals sometimes require different approaches, and it can be smart to partner with someone who “gets” the nuances of your niche.
Finally, consider an online invoice factoring company that integrates with your accounting software for ease of pulling in eligible invoices. At FundThrough, our online portal is compatible with a wide range of accounting software including QuickBooks, OpenInvoice, and others.