WHAT'S IN THIS GUIDE
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).
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.
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.
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.
The invoice factoring application process usually involves four elements, including:
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:
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.
Short answer: to fix cash flow shortfall arising from slow-paying customers.
Slow payments affect small businesses in two significant ways.
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.
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.
Here are some things invoice factoring companies consider before offering you an advance.
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.
Your questions answered.
Factoring rates vary between 1% and 5%, depending on a combination of factors, including:
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.
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.