The Ultimate Invoice Factoring Guide

Exploring invoice factoring as a financing solution for small business

Invoice factoring is the key to unlocking cash flow freedom as you grow your business.

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What is invoice factoring and how is it used?

Invoice factoring is a business financing solution commonly known as a method of bridging gaps in cash flow. It’s also used to raise funds for investing in new equipment, taking on new business, hiring talent, and other business growth activities.

Table of Contents:

Understanding Invoice Factoring

Invoice Factoring Basics

How Invoice Financing Works

How does invoice finance work?

Invoice factoring is a preferred financing method for many small businesses 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. With FundThrough, you can collect on your invoices immediately instead of waiting 30, 60, or 90 days for clients to pay.

How does invoice factoring work?

Invoice factoring and invoice finance are interchangeable terms.

Does invoice factoring fix business cash flow?

Absolutely. Traditionally, invoice factoring came with heavy service fees and financing charges that made it viable for emergency funding–when you couldn’t make payroll or pay a supplier, for instance. Today, our innovative technology means transaction fees have been reduced to just 0.5%, making invoice 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 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 your invoice(s) with FundThrough, the funds are in your bank account right away, typically within one business day. Instead of waiting for your customers to pay, you can put that money to work immediately where you need it.

Is invoice 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. Invoice factoring 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 decades past, there was a certain stigma attached to invoice factoring. This is because back in the day, you had to sell your invoices off to a third party who would then chase clients down and collect the debt. Today, the FundThrough Express app integrates seamlessly with your invoicing software and operates in the background, so clients never know you’re using it.

What is invoice verification for factoring?

Invoice verification is the process of ensuring that the invoices being factored are authentic. FundThrough integrates directly with your invoicing app, taking the legwork out of this stage of the funding process.

Do customers like invoice factoring?

It’s a common question, and for good reason: “Does invoice factoring scare my customers?” 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 invoice factoring, though. One is to improve cash flow, but companies also use invoice factoring to fund new business ventures or contracts, hire talent, invest in new equipment, and more. FundThrough integrates directly with your invoicing software, so customers will never know you’re using an invoice factoring solution.

Invoice Factoring Uses

Who Uses Invoice Factoring?

Who uses invoice factoring?

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. Hundreds of owners across all sectors use FundThrough for invoice financing, and you can hear about their experiences here.

What percentage of companies use invoice factoring?

In Canada, 34% of small businesses requested external financing in 2016 (ISED) and in the U.S., a recent survey found that 50% of small business owners had applied for business financing in 2017. What was remarkable about those survey respondents was that by all measures, they 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. Businesses of all sizes use invoice factoring 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.

Can startup companies use invoice factoring?

Definitely. Invoice factoring is unique in that owners are not required to jump through the income verification and credit history hoops traditional banks require for loan applications. FundThrough understands that you’re just getting started, so your available funding is based on income you’ve already generated via our integration with your invoicing or bookkeeping software.

Can contractors use invoice factoring?

Contractors are more susceptible to cash flow issues than most, due to the many working parts of each contract. Invoice factoring helps contractors cover payroll, pay suppliers and invest in equipment while still taking on new jobs, even when client payments may be slow coming in. The ability to collect on your outstanding invoices instantly frees up funds you’ve already earned, so there’s no need to take on new debt or give up equity in order to raise financing for that next project.

Can construction companies use invoice factoring?

Yes, and more construction companies are turning to alternative finance solutions like FundThrough for its ease of use and low financing charges. Typically, construction factoring companies advance only 20 to 30% of your invoice value and keep the rest once they are able to collect. FundThrough is an app that integrates with your bookkeeping software and offers a completely transparent cost structure, with flexible repayment.

Can staffing companies use invoice factoring?

Invoice factoring is a popular financing method for forward-thinking staffing companies. Gone are the massive finance charges that traditional factors took when they knew you were desperate to cover gaps in cash flow and waiting for payments. Today, online invoice factoring is used as a proactive cash flow planning and business growth financing solution, thanks to the ease of use and low financing fee (just 0.5% at FundThrough).

Can freelancers use invoice factoring?

For sure, and many do! FundThrough introduced integration with FreshBooks early on, to better serve clients who use the bookkeeping software popular with freelancers and entrepreneurs. Invoice factoring empowers freelancers to take control of their cash flow and stay in good standing with suppliers, subcontractors, and other expenses even when customers are late in making payment.

Can you factor government invoices?

You can factor any type of invoice. FundThrough works in the background, so customers won’t even know you’re using it. The invoice factoring software integrates seamlessly with your invoicing software, enabling you to receive advances on invoices without any change in the ownership of the invoice itself. You have 12 weeks to pay back the advance and pay a simple, transparent fee that diminishes with early repayment.

What is freight invoice factoring?

Freight invoice factoring is a common way for trucking companies and independent truckers to manage their cash flow. Traditional invoice factors purchase your outstanding invoices and advance you 20% to 30% of the invoice value, then keep the rest as their fee. Next generation invoice factoring like FundThrough, on the other hand, integrates with your invoicing software and advances you the entire value of the invoice. You pay only a 0.5% transaction fee and have 12 weeks for repayment.

What is a factoring company in trucking?

There are plenty of factoring companies out there willing to discount your invoices in exchange for advancing 70% to 80% of the outstanding funds. But you have an alternative. FundThrough is an innovative solution that lets you keep more of the money you’ve already earned, while getting access to it as it’s earned.

Can I read an invoice factoring case study?

Invoice factoring with FundThrough is so quick and easy that customers are sharing all kinds of experiences online. You can read real customer stories on our Reviews page, and in the Intuit Quickbooks App Center.

Invoice Factoring Options

Types of Invoice Factoring

What are the different types of factoring?

There are a couple of different ways invoice factoring is classified. The first is based on how you use invoice 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 invoice factor that allows you to choose which invoices to finance 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 factor:

  1. Factoring with recourse
  2. Factoring without recourse
  3. Maturity factoring

We’ll take a look at each of these in detail below.

What is factoring with recourse?

Factoring with recourse, or recourse factoring, means that you sell your invoice(s) 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 factor.

What is non-recourse invoice factoring?

Non-recourse invoice 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 factor, so you are not responsible for unpaid invoices.

What is maturity factoring?

In maturity factoring, you do not receive an advance on the amount invoiced. The invoice factor 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 usually advance only 80% 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 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 an invoice factor, 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 invoice factor, or vice versa. Online invoice factoring has made it possible for you to choose the best solution for your business’s unique needs, regardless of geography.

What type of invoice factor is FundThrough?

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

  • Undisclosed factoring. Our app integrates with your invoicing software and works in the background, so your clients will never know you’re using a factoring solution.
  • Cross-border factoring. Companies in the U.S. and Canada alike can use FundThrough. Setting up an account takes just two minutes online and once you’re approved, requesting new funds is a snap.
  • Selective factoring. Relationship management is simple with FundThrough. Our software periodically evaluates your account and adjusts your invoice factoring limit depending on the volume of invoices you’re producing, so your funding solution can grow alongside your business. This makes invoice 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’ve decided to fund right into your bank account, usually within 24 hours.  

Invoice Factoring as a Working Capital Solution

Advantages of Invoice Factoring

Why use invoice factoring?

As invoice 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. Invoice factoring is a great way to fund new equipment, talent or contracts using money you’ve already earned, rather than taking on new debt.

Is invoice 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, invoice factoring can offer a simple, straightforward solution to funding your business using money you’ve already earned.

Is invoice factoring worth it?

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

What are the advantages to invoice factoring?

Invoice 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. Invoice 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.

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 cash flow and proactively plan to avoid cash flow gaps and crises.
  • Generating investment capital so you can buy new equipment, build inventory, take on new and larger contracts, and otherwise grow your business using revenue you’ve already earned.
  • Giving you access to cash when it’s needed, without having to jump through the hoops of traditional lending or take on new debt.

Historically, invoice factoring had a few major cons:

  • 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 invoice factors typically purchased the invoices and handled collections, so clients and customers knew you had used an invoice factor.
  • Until you established a trust relationship with an invoice factor, 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 invoice software programs and applications. It takes just minutes to set up an account, and there’s no credit check or income verification required. Once approved, you receive funds in your account within one business day each time you factor your invoices. Best of all, the manual legwork and redundant administration has been eliminated, so service fees are incredibly low–just 0.5%.

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 on those funds. Invoice factoring, on the other hand, traditionally meant that you sold your invoices to a third-party, who advanced you a percentage of the funds and collected payment from the client.

Today, FundThrough’s innovative technology allows us to factor invoices through seamless integration with your invoicing software, so you can generate working capital as soon as you invoice without customers ever knowing you’re using the service.

Factoring vs invoice trading: Is there a difference?

In invoice trading, companies sell their invoices to the highest bidder in an online auction. That entity then becomes responsible for collecting the balance of the invoice in order to be compensated. It allows the company selling the invoice to free up cash, but typically not at a favorable rate.  

Invoice factoring vs discounting: Which is better?

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

Invoice factoring with FundThrough, on the other hand, advances 100% of the value of your invoice(s) via a direct bank deposit, typically within one business day of the funding request for approved accounts. You pay only a 0.5% fee on the amount funded and have the option to waive fees with early repayment. You can see the cost of invoice factoring with FundThrough on our pricing page.

Invoice factoring vs bank loans: Which is better?

Bank loans typically require a lengthy application and approval process. New and small businesses often lack the personal and business credit history, collateral assets, or other prerequisites banks seek when evaluating loan applications.

When you create an invoice factoring account with FundThrough, on the other hand, your application is evaluated via our platform’s integration with your invoicing software. There’s no lengthy application, business plan presentation, or credit check to complete. Once you’re approved, funding invoices is as simple as an online request. The fee structure is simple and straightforward, with no interest charges and the ability to waive a portion of the 0.5% transaction fee with early repayment.

You can read reviews from real customers and see why small business owners choose FundThrough over bank loans.

Invoice factoring vs overdraft: Which is better?

Invoice 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 invoice factoring is an advance on revenue you’ve already earned. Rather than waiting 30, 60, or 90 days (or more) for your customers to pay, you can unlock that working capital immediately and put it to work building your business, without generating hefty interest payments or financing charges.

The Future of Invoice Factoring

Next-generation Factoring Companies

What is an invoice factoring company?

An invoice factoring company 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% advanced while tapping into the power of invoice factoring, with FundThrough.

Is using invoice factoring considered a negative by a company’s clients?

FundThrough Express works in the background, so your clients and customers won’t even know you’re using it. The invoice factoring software integrates seamlessly with your invoicing software, enabling you to receive advances on invoices without any change in the ownership of the invoice itself. You have 12 weeks to pay back the advance and pay a simple, transparent fee that diminishes with early repayment.

Do invoice factoring companies need to be local?

Absolutely not! In fact, choosing an online solution gives you 24/7, hassle-free access to fund your invoices when and where you need to, on whatever device is convenient for you.

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

Historically, banks and finance companies purchased unpaid invoices and collected the debts themselves. This required some investment on their part, as they needed to pay for the labour and infrastructure of the system. FundThrough Express is an agile, innovative solution that automates the process of invoice factoring. This reinvention of invoice funding means you’re able to access more of the money you’ve already earned when you need it to pay suppliers, make payroll, or invest in new inventory and equipment.

How long does it take to factor invoices?

Once your FundThrough account is set up and your invoicing app integration complete, you’ll receive cash in as little 24 hours of each new invoice factoring request. The money you need to cover gaps in your cash flow is literally at your fingertips.

Can you factor invoices online?

You bet. This is what makes FundThrough Express the cash flow solution of choice for so many small to medium-sized businesses. Our software integrates seamlessly with accounting platforms and invoicing apps including Quickbooks, FreshBooks, Excel, Jobber and Cortex. Support for Sage One, Sage 50, Wave and Xero is coming soon.

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 within 24 hours of integration with your invoicing app.

Are invoice factoring companies near me better than companies elsewhere?

Nope, it’s a digital age! When you want the best, choose the #1 invoice factoring company in Canada and the U.S. (that’s us!).

How much does a factoring company charge for their services?

Traditionally, invoice factoring companies bought your invoices at a discounted rate. That meant you would receive 80-85% of the value as payment for the work you’d done. Thankfully, you can do so much better than that now. The efficiencies created with FundThrough’s innovative invoice factoring app mean you retain ownership of your invoices and can advance the full value, while paying a single, transparent 0.5% fee.

Who are the largest invoice factors?

For many years, banks and traditional factors were the largest providers of invoice factoring, and they made a great deal of revenue at it, too. After all, they were keeping 15-20% of your invoice value for themselves. Alternative finance solutions like FundThrough have shaken up cash flow solutions and today, we’re the top factoring app in Canada and the U.S.

Is invoice factoring regulated?

Invoice factoring works differently than traditional methods of lending and funding, and as such is not regulated under the same legislation traditional lenders follow in the U.S. and Canada. With invoice factoring, you’re not trading a share of ownership in your company in exchange for funds. You aren’t taking out a loan, either. Invoice factoring gives you access to funds you’ve already earned by advancing your accounts receivable. This helps bridge gaps in cash flow that occur naturally in many different types and sizes of businesses.

Who are the best invoice factoring companies?

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

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