Invoice Factoring for Small Businesses

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WHAT'S IN THIS GUIDE

1. What is Small Business Factoring?
2. How Does Invoice Factoring Help Small Businesses?
3. The Pros and Cons of Small Business Invoice Factoring
4. How Does Small Business Factoring Work?
5. Why Do Small Businesses Use Factoring?
6. Is Invoice Factoring Right for my Small Business?
7. Am I a good candidate for invoice factoring?
8, Can Small Businesses Do Invoice Factoring with Bad Credit?
Small Business Invoice Factoring FAQs

If your small business has to wait longer for invoices to be paid, you’re not alone. Most of the studies around invoicing have found that most companies pay late. Needless to say, unpaid invoices cause cash flow strains that make it tough to pay bills, ultimately resulting in slow growth. Unfortunately, invoice financing offerings from banks can be hard to access.

Thanks to the internet, smaller businesses can factor their invoices and solve cash flow issues. For example, an invoice factoring company like FundThrough allows you to open an account online, upload your invoices, find your funding rates, and receive cash in your bank within 24 hours. Here’s what you need to know about invoice factoring — including the types of factoring available (recourse and non-recourse).

What is Small Business Factoring?

Small business invoice factoring is a type of accounts receivable financing in which you sell your unpaid invoices to a factoring company at a discount. In return, you receive a lump sum to meet immediate business needs and the necessary revenue to keep the doors open.  

How Does Invoice Factoring Help Small Businesses?

Short answer: invoice factoring helps solve the cash flow challenges that small businesses often face.

Being a small business in any industry almost always means that you have limited resources — including working capital. So for your business to keep running, it becomes crucial for customers to pay up as fast as possible, leaving fewer outstanding invoices on your balance sheet. However, the problem is that customers aren’t obliged to pay until invoices are due — usually somewhere between 30 and 90 days.

Small business invoice factoring is a type of financing that shortens the wait time. With an invoice factoring service like FundThrough, a leading online factoring company, any type of business can turn their outstanding invoices into cash within one business day giving your business the necessary revenue to grow and stay viable.

How Does Small Business Factoring Work?

40 days: That’s the average wait time before small businesses receive invoice payments — based on FundThough’s 2020 client data.

But many small business bills and expenses won’t wait that long. Think salaries, loan repayment, utilities, and insurance.

Small business invoice factoring makes it possible to shorten the wait.

At FundThrough, our innovative technology allows you to factor your invoice(s) and have the cash in your bank account within 24 hours.

Here’s how small business invoice factoring works.

The invoice factoring application process usually involves four elements, including:

  • Your company
  • Your business clients or customers
  • Unpaid invoices issued to your clients or customers (also known as accounts receivables)
  • The sale of those invoices to an invoice factoring company (like FundThrough)

Here’s a breakdown of the steps involved:

Step 1: Confirm that your business invoices other businesses and that your invoice has net terms of 30 days or more. 

Step 2: Set up an account with an invoice factoring company (you can do that with FundThrough here). Review the factoring companies products, rates and required documentation. For validation purposes, you will be required to submit several business documents. Documents can include:

  • Business formation/ legal proof of business documents
  • Government-issued photo ID
  • Void check

Step 3: Submit your completed application for approval. 

Step 4:  Submit your invoices manually or by connecting to a supported invoicing software or accounting software.

Step 5:  Select the invoice you’d like to finance and submit it for review. This is when the factoring company will confirm the eligibility of the invoice 

Step 6: Have funds sent to your account. 

The Pros and Cons of Small Business Invoice Factoring

Pros of Small Business Factoring

  • Easier and faster access to working capital: Bank business loans, traditional loans, and lines of credit are the traditional go-to solution for filling the cash flow gaps that arise from invoice payments’ unpredictability. However, banks usually have cumbersome paperwork requirements, and the funding period can be anywhere between several days to a few months. However, FundThrough typically reviews applications and provides a cash advance within 24 hours. Your credit or time in business is never an issue.
  • Healthy and predictable cash flow: Run a company for any length of time, and you’ll quickly find that consistent cash flow is like oxygen to the business. And as with anything that lives on oxygen, cash needs to be consistently available to cover ongoing expenses and seize growth opportunities. The ease of access that invoice factoring allows small business owners to keep their businesses alive and growing.
  • Productive use of resources: When you have unpaid invoices, you’re likely to deploy resources (time and even money) to chase them. If anything, your business survival depends on receiving the payments. However, chasing invoices isn’t a productive use of resources. It comes with the opportunity cost of lower productivity and efficiency. Factoring saves you that cost. And, you can save valuable time by connecting your accounting software. FundThrough will bring them in automatically. Transactions are straightforward and access to cash is fast.
  • Lesser risk: Most traditional financing solutions such as loans and lines of credit demand valuable assets (properties, for instance) as collateral. With invoice factoring, however, your unpaid invoices are the only collateral. Plus, there is no minimum credit score needed and your personal credit score isn’t an issue.
  • Lower overall cost: At face value, bank loans and lines of credit may cost less than invoice factoring. But factoring usually comes with additional services that can lower your overall administrative expenses. Before selling or rendering services to any company, you first want to be sure that they are creditworthy, and that costs money. However, as part of their business, invoice factoring companies conduct credit analysis of your vendors to which they’ll give you access. That saves you the money you’d have paid to professional credit analysts.

 

Cons of Small Business Factoring

  • Cost: As mentioned above, the cost of factoring is higher than that of a traditional bank loan. However, there is no application fee. Funding rates range between 1% to 5% per month — depending on the factoring company. Proper diligence then becomes crucial to be sure that the trade-off is worth the cost and that you’re working with the best factoring company. At FundThrough, our AI-driven technology allows us to offer competitive rates. Create a free account to find your rates.
  • Liabilities: There’s always a risk that certain customers or vendors won’t pay their invoices. You may be responsible for repayment if the client doesn’t pay — depending on the agreement structure you have with the factoring company. And speaking about agreement structure as it relates to liability, there are two types, including:
    • Recourse factoring: the factoring company buys your invoice with the agreement that you’d buy them back if the client doesn’t pay.
    • Non-recourse factoring: here, you transfer the liability of unpaid invoices to the factoring company.

Why Do Small Businesses Use Factoring?

Short answer: to fix cash flow shortfall arising from slow-paying customers.

Slow payments affect small businesses in two significant ways.

  • They make it difficult to pay your bills and creditors on time, which puts your credit rating at risk.
  • They limit you from harnessing growth opportunities.

With the near-instant access to cash that invoice factoring offers, small businesses can maintain positive credit ratings and a healthy cash turnover rate.

Supplying nutritious snack bars to grocery chains across Canada, Made with Local Owner and Founder, Sheena Russell came to FundThrough because they needed to get paid faster. They  partnered with FundThrough to ensure that their local honey and fruit farmers were getting paid asap, and to confidently expand to over 450 stores across Canada.

READ CASE STUDY →

Is Invoice Factoring Right for my Small Business?

In general, invoice factoring is right for your business if you suffer from cash shortfall due to invoices’ slow payments. That equals paid invoices on time in a short time frame.

Still, as with most business decisions, there are considerations. Some include:

Do you need quick access to cash?

The best part of invoice factoring is quick accessibility. If you cannot afford to wait out the typical 30 to 90 days waiting period, invoice factoring can solve your short-term cash needs.

Is your profit margin wide enough to cover factoring fees?

Every time you factor in an invoice, you lose part of your profit. Consequently, invoice factoring may work best for businesses that can remain profitable after accounting for the cost of factoring.

Are your customers credit-worthy?

As a financing option, factoring works best if your customers always pay their invoices when due. It reduces the risk of bad debt for you and makes a factoring company more likely to work with your business.

Am I a good candidate for invoice factoring?

Here are some things invoice factoring companies consider before offering you an advance.

  • Nature of business: you must be a registered business selling goods or services to other businesses.
  • Service completion: invoice factoring is only available for goods or services that your clients have marked as complete.
  • Encumbrance-free invoice: since invoices are the only collateral in a factoring arrangement, encumbrances such as tax liens can make it difficult to qualify for factoring. 

Can Small Businesses Do Invoice Factoring with Bad Credit?

Yes. Invoice factoring is secured by the invoices you issue to your customers. As a result, factoring companies will offer an advance on your invoices — even if you have low or bad credit. A factoring company’s decision to extend an invoice advance mostly depends on your customer’s credit rating.

Small Business Invoice Factoring FAQs

Your questions answered.

Factoring rates vary between 1% and 5%, depending on a combination of factors, including:

  • The volume of invoices you’d like to factor: larger amounts of factored invoices mostly lowers the factoring fee.
  • How fast your customers pay: because factoring companies charge a fee per month, fast-paying clients can lower your factoring cost.
  • Customer diversity: a large assortment of customers usually means lesser risk, which can help lower your factoring cost.

No, invoice factoring isn’t a loan. In an invoice factoring arrangement, you’re selling your invoices to the factoring company at a discount for upfront cash. Transactions are easy at no cost to you.

Invoice financing and factoring are similar in that they both allow you to use unpaid invoices as collateral to access cash. 

But they work differently.

  • Invoice financing is a type of loan in which your unpaid invoices serve as collateral for a line of credit. Factoring involves the selling of invoices for upfront lump cash, less a funding fee.
  • With invoice financing, you’re entirely responsible for chasing down unpaid invoices. Factoring companies, on the other hand, offer help in getting invoices paid.

Recourse factoring is a factoring agreement that stipulates the client is required to buy back any unpaid receivables from the factor after a specified period of time. The risk stays with the client.

With non-recourse factoring, the factor takes on the obligation of absorbing any accounts receivables that remain unpaid, so the client is at no risk.

Simple. Intuitive. Small Business Invoice Factoring.

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