The Ultimate Invoice Factoring Guide

How Invoice Factoring Works for Small Business - Guide | FundThrough

TABLE OF CONTENTS

Introduction

How does invoice financing work? How does invoice factoring work?

There are two ways to fund invoices: invoice factoring or financing. So how does factoring work? With factoring, invoices are sold to a factoring company in exchange for immediate payment (minus a small fee). The factoring company works with your client to settle the invoice according to the original payment terms. Invoice financing uses receivables to secure a revolving line of credit, which you can then use to fund an invoice ahead of net terms. Invoice financing is sometimes mistakenly referred to as an invoice factoring loan, factoring loan, invoice lending, factoring lending, or as invoice loans. 

How Factoring Works

What is invoice factoring and how is it used? How do factoring companies work?

Invoice factoring for small business is a preferred financing method because it works by advancing money you’ve already earned. You don’t have to present a business plan, pass credit checks, or otherwise jump through hoops that have traditionally made it difficult for new and small businesses to get funded. By factoring invoices with FundThrough, you can collect on your invoices immediately instead of waiting 30, 60, or 90 days for clients to pay. 

Does invoice factoring fix business cash flow?

Absolutely. Traditionally, factoring came with heavy service fees and financing charges that really only made it appealing for emergency funding  such as when you couldn’t make payroll or pay a supplier. Today, our innovative AI-powered technology means transaction fees have been significantly reduced, making factoring an attractive alternative to venture capitalism, bank loans, and other types of funding that require you give up some control of your business or commit to long-term debt. You can use funding as a fast and flexible solution anytime to cover cash flow issues such as payroll, purchasing supplies, help with seasonal strain, and grow without debt or equity. You can read all about the benefits of invoice factoring as a cash flow solution in our Ultimate Cash Flow Guide.

Does invoice factoring solve for late payments?

Yes. When you fund an invoice with FundThrough, funds are deposited to your bank account typically within days. Not only does factoring solve for late payments, it gets you paid ahead of net terms – our clients save 30-45 days of waiting on average, thanks to our services. Instead of chasing receivables and waiting for your customers to pay, you can put that money to work immediately, where you need it.

Is factoring a negative way to solve cash flow gaps?

Not at all. Maintaining positive cash flow is critical to the success and growth of your business. Factoring invoices helps you solve gaps in cash flow without taking on new debt or giving up ownership and control of your business with equity or VC financing. You can learn more about improving your cash flow in our Ultimate Cash Flow Guide.

Is invoice factoring bad?

In the past, there was a certain stigma attached to factoring. This is because you had to sell your invoices off to a third party who would then chase clients down (often aggressively) to collect payment. FundThrough contacts your customer for the initial setup, and to confirm any invoices you wish to fund. In the event of late payment, we work with you first to resolve the issues before contacting your customer. To learn more about how we preserve your reputation, see: How We Work With Your Customers

What is invoice verification for factoring?

Invoice verification is the process of ensuring that the invoices being factored are authentic. FundThrough integrates directly with invoicing software such as QuickBooks, OpenInvoice, and WorkBench, taking much of the legwork out of this stage of the funding process.

Do customers like invoice factoring?

It’s a common question, and for good reason. You don’t want customers to think you’re having cash flow issues and potentially pull their business.

There are a lot of reasons people use factoring that don’t involve cash flow problems. Companies also use factoring to fund new business ventures or contracts, hire talent, invest in new equipment, and more. The fact is that many large companies are used to working with suppliers who use invoice factoring solutions, and have entire departments set up to handle these payments. If you really don’t want to involve your customer, our Express Financing option is one solution.

Chapter 2

Entrepreneurs and businesses of all sizes use invoice funding to help cover gaps in cash flow and generate financing without giving up equity or committing to long-term loans, among other reasons. Owners across all sectors use services like FundThrough to grow on their terms, and you can hear about their experiences here.

Factoring Use Cases

What percentage of companies use factoring?

In Canada, 34% of small businesses requested external financing in 2016 (ISED) and in the U.S., a 2017 survey found that 50% of small business owners had applied for business financing in 2017, including factoring for small business. Interestingly, the majority of survey respondents were successful and often established businesses; 60% had been in business for five years or more, and 80% had a personal credit score of 650 or above.

Can small businesses use invoice factoring?

Absolutely. Small business invoice factoring solutions make sense for a number of reasons: to raise working capital, improve cash flow, expand their product or service offerings, purchase equipment, increase the size or quality of their workforce, buy out a partner, and more. Factoring also allows businesses to take on growth opportunities. Invoice finance for small business can also help bridge cash flow gaps for everyday expenses like payroll.

Can startup companies use invoice factoring?

You bet! Like small business factoring, startup factoring is unique in that owners are not required to jump through the income verification and credit history hoops traditional banks require for loan and credit applications. Factoring with FundThrough works based on income you’ve already earned and invoiced for – it’s your customer’s credit history that’s most important. Our integration with QuickBooks, OpenInvoice, and WorkBench makes it easy to see which invoices are eligible for funding.

Can staffing companies use invoice factoring?

Definitely. Factoring is a popular financing method for forward-thinking staffing companies. Gone are the huge charges that traditional factoring companies took when they knew you were desperate to cover funding gaps and stuck waiting for payments. Today, online factoring is used as a proactive cash flow planning and business growth financing solution, thanks to the ease of use and low financing fees.

Can you factor government invoices?

Yes! Factoring isn’t limited to business factoring. You can factor any type of invoice, including government invoices. Government contract factoring allows you to get an advance on your unpaid local or federal government receivables. 

What is freight invoice factoring?

Freight factoring is a common way for trucking companies and independent truckers to manage their cash flow. Traditional factoring companies would purchase your outstanding invoices and advance just 20% to 30% of the invoice value, keeping the rest as their fee. FundThrough, on the other hand, advances you the entire value of the invoice, minus a small fee.

Can I read a factoring case study?

Our clients are our best advocates. Learn how they use invoice funding to grow their businesses in these case studies. You can also read real customer stories on our Reviews page, and in the Intuit Quickbooks App Center.

Types of Invoice Factoring

What are the different types of factoring?

There are a couple of different ways factoring is classified. The first is based on how you use factoring as a financing tool:

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 a cash flow emergency.

The second way invoice factoring is classified refers to the structure of your agreement with the factoring company:

1. Factoring with recourse

2. Factoring without recourse

3. Maturity factoring

Let’s take a look at each of these in detail.

What is factoring with recourse?

Factoring with recourse, or recourse factoring, means that you sell your invoice to a factoring company, which then releases an advance payment to you (typically 70-80%). They are responsible for debt collection and release the remainder of the invoice, less their transaction fee, to you once they are able to collect the debt. With recourse factoring, you are responsible for paying back the advance even if the invoice remains unpaid to the factoring company.

What is non-recourse invoice factoring?

Non-recourse factoring, or factoring without recourse, works in much the same way as factoring with recourse. The key difference is that with non-recourse factoring, the liability of an unpaid invoice transfers to the factoring company, so you are not responsible for unpaid invoices.

What is maturity factoring?

With maturity factoring, you do not receive an advance on the amount invoiced. The factoring company pays out the invoiced amount (less their financing fee) on the invoice due date, or some other date you’ve agreed upon in advance.

What is invoice discounting?

Invoice discounting means that your invoices are used as collateral for a loan. Invoice discounting companies advance up to 95% of the value of your invoice(s). You will pay an interest rate above prime, plus a monthly fee to maintain the loan as long for as its takes you to pay it back.

What is disclosed factoring?

When a third-party purchases your invoices and begins debt collection, your clients receive communications from that party. The relationship is then disclosed; it’s evident that you’ve used a factoring company, as they are either collecting on your behalf or are now the owner of the debt and collecting on their own behalf.

What is cross-border factoring?

Cross-border factoring simply means that a US company might use a Canadian factoring company, or vice versa. Online invoice factoring makes it possible for you to choose the best funding solution for your business’s unique needs, regardless of geography.

What type of factoring does FundThrough do?

Our AI-backed technology has enabled us to offer clients the best of all worlds:

  • Undisclosed factoring. Our platform integrates with popular invoicing software and works in the background, so your clients don’t have to know you’re using a factoring solution. (Express service only).
  • Cross-border factoring. Companies in both the U.S. and Canada can use FundThrough. Setting up an account takes just a couple of minutes and once you’re approved, requesting funding is easy.
  • Selective factoring. Relationship management is simple with FundThrough. Our software periodically evaluates your account and adjusts your funding limit depending on your eligible invoices, so your funding solution grows alongside your business. This makes factoring a proactive business financing tool, as well as a reliable source of emergency funding.
  • Online factoring. Instead of waiting 30, 60, or 90 days for customers to pay, we deposit the amount you choose to fund directly into your bank account, often in a matter of days and up to 97% faster than net terms!

Chapter 3

Why Use Invoice Factoring?

As factoring has evolved and become more affordable, more and more companies are using it to solve gaps in cash flow, raise working capital, and fund the growth of their business. Factoring is a great way to fund new equipment, talent, or contracts using money you’ve already earned, rather than taking on new debt.

Advantages of Invoice Factoring

Is factoring a good idea?

That depends on the unique needs of your business. Compared to the costs, complexity, and risks of financing solutions like bank loans and venture capitalism, and the relatively low success rate of crowdfunding, factoring can offer a simple, straightforward solution to funding your business using money you’ve already earned.

Is invoice factoring worth it? How much does factoring cost?

This is a common concern, as in years past the transaction fees and service charges of factoring made it cost-prohibitive for many businesses. Today, innovative technology and our straightforward price structure make invoice funding a smart funding solution for new and small businesses in all sectors. You can view our pricing to see how much factoring costs at FundThrough and decide whether it’s right for you.

What are the advantages to factoring?

Factoring empowers you to put money you’ve already earned to work in your business right away. Gone are the days of waiting 4, 8, or even 12 weeks to collect payment. Factoring puts revenue in your pocket immediately so you can pay your team, invest in new inventory and equipment, take on new and larger contracts, and otherwise build your business on your terms. It puts you in control of when invoices get paid, and you don’t have to spend precious time chasing down payments.

What are some invoice factoring pros and cons?

The pros of invoice factoring include:

  • Improving your company’s cash flow so you can make payroll, pay your suppliers, and meet other financial obligations.

  • Empowering you to take control of your funding and proactively plan to avoid any gaps or crises.

  • Generating investment capital so you can buy new equipment, build inventory, take on new and larger contracts, and otherwise grow your business on your terms.

  • Giving you access to cash when it’s needed, without having to jump through the hoops of traditional lenders, or take on new debt.

 

Historically, factoring had a few negatives:

  • Like payday loans, the fees were so cost-prohibitive that it was really only viable for occasional use as a stop-gap for cash flow emergencies.
  • Traditional factoring companies typically purchased the invoices and handled collections, so clients and customers knew you had factored an invoice. Traditional factoring companies also included no shortage of hidden fees.
  • Until you established a relationship with a factoring provider, you needed to have invoices verified for each new round of funding.

 

FundThrough has revolutionized invoice factoring by integrating directly with a wide range of invoicing software. It takes just minutes to set up an account, and there’s no minimum or maximum funding requirements. Once approved, funds are typically deposited to your account within a matter of days. Best of all, the manual legwork and redundant administration has been eliminated, making service fees highly competitive.

Invoice factoring vs invoice financing: Is there a difference?

With invoice financing, your invoices are essentially used as proof that you can pay back a short-term advance (loan) on those funds over a certain timeframe. Factoring, on the other hand, means that you sell your invoices to a factoring company who advances a percentage of the funds and collects payment from your client.

Today, FundThrough’s innovative AI-powered technology allows us to fund invoices thanks to seamless integration with popular invoicing software, so you can generate working capital as soon as you invoice, without the hassle of the big banks.

Factoring vs invoice trading: Is there a difference?

Invoice trading is when companies sell their invoices to the highest bidder in an online auction. The winning buyer then becomes responsible for collecting the balance of the invoice in order to be compensated. It allows the company selling the invoice to get fast access to cash, but these factored invoices often don’t come at a favorable rate.  

Invoice factoring vs discounting: Which is better?

Invoice discounting means that your invoices are used as collateral for a short-term loan. Invoice discounting companies typically advance around 80% of the value of the invoice, and charge an interest rate above prime (plus a monthly fee) to maintain the loan, for as long as its takes to repay.

Factoring with FundThrough advances 100% of the value of your invoice (minus a small fee) via direct deposit to your bank account, often in a matter of days. We believe in full transparency, which is why you can see the cost of invoice funding with FundThrough on our pricing page.

Factoring vs bank loans: Which is better?

Bank loans typically require a lengthy application and approval process – valuable time that a small business often doesn’t have. Additionally, most new and small businesses often lack the personal and business credit history, collateral assets, or other prerequisites banks require when evaluating loan applications. It’s one reason invoice financing for small business is a popular option for boosting funding. 

When you create an account with FundThrough (it only takes a couple of minutes to get started) your application is evaluated using our innovative AI technology and integration with popular invoicing software such as QuickBooks almost immediately. No lengthy application or business plan presentation required! Once you’re approved getting funded is as simple logging in and submitting an invoice. Our fee structure is simple and straightforward, with no sneaky hidden fees.

Factoring vs overdraft: Which is better?

Factoring is preferable to a business loan or overdraft because it allows you to generate capital without creating new debt. Both business loans and overdraft are a form of lending, whereas factoring is an advance on revenue you’ve already earned. With factoring, you don’t have to worry about generating hefty interest payments or financing charges – you can simply put your money to work, however you see fit.

Invoice Factoring FAQs

What is a factoring company?

A factoring business advances funds that you’ve already earned, based on your outstanding invoices. Traditionally, this meant selling your invoices to a third-party called a “factor” at a discounted rate, so they could collect the payments later. Today, you can retain ownership of your invoices and have 100% of the value advanced by tapping into the power of invoice funding with FundThrough.

Do factoring companies need to be local?

Absolutely not! In fact, choosing an online solution gives you 24/7, hassle-free access to fund invoices when and where you want, however is most convenient for you.

Why do factoring companies or banks finance only 80-85% of an invoice?

Historically, banks and other finance companies purchased unpaid invoices and collected the debts themselves. This required some investment on their part, as they needed to pay for the labor and infrastructure of the system. FundThrough offers an agile, innovative solution that automates the factoring process. This means you’re able to access more of the money you’ve already earned, without the hefty fees.

How long does it take to factor invoices?

Once your FundThrough account is set up and integration with your QuickBooks, WorkBench, or OpenInvoice account is complete, you’ll receive cash in days for eligible invoices. The money you need to cover any funding gaps is literally at your fingertips!

Can you factor invoices online?

You bet. This is what makes FundThrough the top choice of so many small to medium-sized businesses. Our software integrates seamlessly with accounting platforms and invoicing apps including Quickbooks, OpenInvoice, and Cortex

Is invoice factoring fast?

It is with FundThrough. Setting up your account takes just a couple of minutes, and we’ll let you know your initial limit shortly after integration with your QuickBooks, WorkBench, or OpenInvoice account is complete. Once approved, simply select an eligible invoice to fund, and you’ll get a direct deposit often in as little as a few days!

How much does a factoring company charge for their services?

Traditionally, a factoring company bought invoices at a discounted rate – often as little as 80-85% of the face value. Top factoring companies advance 100% of the invoice, less a fee. The efficiencies created with FundThrough’s innovative invoice funding platform mean you can advance the full value for cash flow you can count on. Our fee structure is simple and straightforward, with no hidden charges.

Who are the largest factoring companies?

For many years, banks and traditional factors were the largest providers of factoring for business, and they made a lot of money off the backs of small business doing it, too. After all, they were keeping 15-20% of an invoice’s value for themselves. Alternative finance solutions like FundThrough have shaken up industry and today, we’re one of the top factoring companies in the USA and Canada.

Is invoice factoring regulated?

Factoring works differently than traditional funding methods. As such, it’s not regulated under the same legislation that traditional lenders such as banks must follow in the U.S. and Canada. With factoring, you’re not trading a share of ownership in your company in exchange for funds. You aren’t taking out a loan, either, technically. Factoring gives you access to funds you’ve already earned by advancing your accounts receivable.  

Who are the best invoice factoring companies?

The best factoring company gives you access to quick, convenient funding when you need it, with a transparent fee structure that’s easy to understand. The same is true for the best invoice financing companies, including US factoring companies. See what real business owners have to say about choosing FundThrough as their factoring company of choice.

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