Small Business Invoice Factoring

The Cash Flow Problem for Small Businesses

Invoice factoring dates back to ancient Mesopotamia around 2000 BCE, where merchants sold their receivables to financiers in exchange for immediate cash. The more things change, the more they stay the same: today, small businesses have the same cash management problems they've had for thousands of years — now, we can quantify them. Consider these stats from SCORE:

• 79% of small businesses start out underfunded
• 82% of SMBs fail due to poor cash flow management
• 29% run out of cash altogether

While typical net terms are 30, 60, or even 90 days, FundThrough client data shows that the average time small businesses have to wait before getting paid is 40 days — a major contributor to general cash management issues as well as specific challenges. The good news? Invoice factoring solves these problems and more. FundThrough's approach makes it easy, thanks to our online platform and integration with popular accounting software like QuickBooks and OpenInvoice.

What Is Small Business Invoice Factoring & Financing?

What is Small Business Factoring?

Small business factoring is a financing method where a business sells its unpaid invoices to a factoring company at a discount. This provides immediate cash flow, allowing businesses to cover expenses without waiting for customer payments. The factoring company collects the full invoice amount from the business' customer, making a profit on the difference.

What Is Invoice Financing for Small Businesses?

Invoice financing (or receivable financing) is often another term for invoice factoring. It can also be a funding solution where businesses use unpaid invoices as collateral to secure a cash advance. Businesses draw funds up to the amount of approved outstanding A/R, and make scheduled repayments with a pre-determined amount of interest per payment. This improves cash flow without involving the business' customer.

Types of Small Business Invoice Factoring

Spot factoring is a type of invoice factoring where a business sells a single invoice or a small batch of invoices to a factor for immediate cash, rather than committing to a minimum funding volume. This type of factoring provides the ultimate flexibility.

Whole turnover factoring is a factoring arrangement in which a business sells all or most of its accounts receivable to a factoring company on an ongoing basis. This usually requires getting locked into a long-term contract that obligates you to fund.

Recourse vs Non-recourse Factoring

How Does Invoice Financing Work?

Invoice financing allows businesses to borrow money using unpaid invoices as collateral. A lender approves a funding limit, the business draws funds as needed, and repays the balance in instalments with a percentage fee added. This improves cash flow without waiting for customer payments. Invoice financing can also be a synonym for invoice factoring. Here's how the process typically works:

1. After getting approved with a lender, you're given a credit limit.
2. You submit outstanding invoices as collateral.
3. You draw funds up to your limit as needed.
4. You repay the advance in predetermined instalments with an additional fee on an agreed-upon schedule. Sometimes repayments can start immediately after you've received the capital, so ask about when repayments start and ensure you're prepared accordingly.

Invoice Factoring Costs: How to Get the Best Deal

Invoice factoring rates vary between 1% and 6% — a wide range. Types of pricing, certain pricing criteria, and the factoring company's pricing strategy affect the final amount you'll pay.

The Factors That Determine Invoice Factoring Costs

Hidden Factoring Fees

The most important point to remember when comparing pricing between invoice factoring companies is that the rate is not the whole cost. Hidden fees can hide behind a low rate. A few examples of fees you could encounter include:

• Initial setup fee: 1% of facility
• Monthly usage monitoring fee: $100 per payor
• Additional fee for 90+ day net terms: 1% of invoice amount
• Early invoice payment fee: 0.5% of invoice amount
• Overpayment fee: 1% of overpayment amount, if the client's customer overpays their invoice
• Return check fee: $100
• Same day funding fee: $500

Pricing Example: Flat Rate

The factoring company charges a flat percentage per invoice by its net term length. Here's how it works:

• Invoice face value: $100K
• Net terms: 30 days
• Invoice factoring rate: 2.75% per 30 days
• Total fees, assuming on-time payment: $2,750

What to Look for in a Small Business Factoring Company

Experience with small businesses matters. The definition of small business is wide — the Small Business Administration in the U.S. defines it as employing fewer than 1,500 people with a max revenue of $41.5 million. You need a partner who can work with businesses at different stages and sizes, and understands your needs at every stage of growth.

Flexibility

The best invoice factoring companies will offer flexibility in how they handle your business, listening to your unique needs. Additionally, you want a factoring business that lets you fund on your terms — no funding obligations, no maximums, and no long-term commitments once the invoice is paid.

Quick and Efficient

The best small business factoring companies use technology and automation to make getting funded a seamless process. FundThrough's invoice finance for small business platform boasts QuickBooks integration, automatically pulling in eligible invoices so you can get funded in just a few clicks.

Fee Transparency

Different factoring companies charge different funding rates, meaning the cost of invoice factoring varies. But not all companies are upfront about hidden fees — like initial account setup fees, service fees, or transaction fees — that can leave you with less funding than you planned for.