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. In fact, according to the “Working Capital Playbook,” 93% of businesses¹ experience late payments! FundThrough client data shows that the average time small businesses like yours have to wait before getting paid is 40 days. But it can feel like much longer when you need working capital to cover off everyday expenses like payroll, purchasing supplies, and seasonal dips in cash flow. An unforeseen emergency could leave your business on life support without an adequate source of cash. Let’s not forget about the lost revenue your business misses out on when it doesn’t have the upfront cash to staff up and scale up for new projects.
We know the kind of pressure and uncertainty these problems can cause, because at FundThrough, we’re entrepreneurs, too. It’s frustrating and stressful to be stuck waiting on much-needed cash for work you’ve already done, while trying to collect outstanding accounts receivable. Unfortunately, many SMBs are beholden to the extended payment terms that much larger companies set. It’s not unheard of for these companies to set net terms of 30, 60, or even 90 days, leading to a variety of problems for small businesses:
Small business factoring is an innovative solution to all of these issues. Getting your invoices paid in days rather than waiting on lengthy payment terms provides quick, flexible funding without debt or dilution. With FundThrough, it’s also quick and easy thanks to our online platform and integration with popular accounting software like QuickBooks and OpenInvoice. Continue reading to learn more about small business factoring and whether factoring invoices is right for you.
Small business invoice factoring is a type of accounts receivable financing in which you sell your unpaid invoices to a factoring company for a fee. In return, the factoring company gives you a cash advance within a few business days and waits on your customer to pay the outstanding invoice according to the original payment terms. You get put your funding to work and get back to business.
Invoice financing is a type of business financing where a small business sells its outstanding invoices or accounts receivable to a third-party financing company, also known as a factor, at a discount. In return, the factor provides you with an advance of the full amount of the outstanding invoice. You repay the factoring company for the advance (plus their fee) over a period of time, usually with weekly or monthly payments. You continue to work with your client on collecting payment. This allows you to receive an immediate cash flow injection, rather than waiting for slow-paying customers to pay their outstanding invoices.
The short answer: Invoice factoring and invoice financing help solve the cash crunch that small businesses often face.
The more detailed answer is that these funding methods smooth out any cash flow gaps your business might experience due to a number of issues — the biggest one being late payments or lengthy net payment terms.
Invoice factoring and financing also help your small business grow by giving you a flexible funding boost when you need it. This is especially important when it comes to bidding on new business or taking on a growth opportunity. You get peace of mind that you’ll be able to meet the demands of larger projects.
In addition, small business factoring in particular helps you grow your business without taking on any debt, or giving away equity in your business. You’re simply getting paid for work you’ve already done that’s tied up in accounts receivable. Small business factoring is not a loan, and it’s not another business purchasing a stake in your company, it’s just an advance on unpaid invoices.
Small business invoice financing helps in much the same ways that invoice factoring does. However, in our experience with our clients, invoice factoring can provide added value to businesses by freeing up admin time and cost from not having to manage accounts receivable. Additionally, because invoice factoring is not a loan – unlike invoice financing – it doesn’t show up on your balance sheet as a liability.
The invoice factoring application process usually involves four elements, including:
Here’s a breakdown of the steps involved when you factor an invoice:
Step 1: See if you’re qualified and create an account with an invoice factoring company. For validation purposes, you will be required to submit several business documents, which might include:
Step 2: Submit an invoice for funding. You can submit your invoices manually or by connecting to an integrated accounting software such as QuickBooks. With FundThrough, there’s no monthly minimum funding obligation or maximum amount of invoices you can fund.
Step 3: A factoring company does due diligence. This is when the factoring company will confirm the eligibility of your business, your customer, and the submitted invoice.
Step 4: Your customer signs an NOA. When your customer signs a Notice of Assignment, they acknowledge that the factoring company now owns the invoice, and they must redirect payment. While it might concern you with your customer being involved, many large companies are used to this process.
Step 5: Funds are deposited to your account. If your invoice is approved for funding, you’ll receive a cash deposit to your business bank account, less a fee (otherwise known as the invoice factoring cost). You can enjoy peace of mind knowing you have the necessary cash to grow your business and cover any expenses.
Step 6: Your customer pays the factoring company. When the invoice is due, your customer pays the outstanding invoice to the factoring company, and the funding process is complete.
Here’s how the invoice financing process typically works:
1. After getting approved with a lender, you’re given a credit limit.
2. You submit outstanding invoices to get financed.
3. The financing company sends you the full dollar amount of the invoice.
4. You repay the advance in agreed-upon instalments with an additional fee on an agreed-upon schedule until the advance is repaid. Sometimes the repayments can start immediately after you’ve received the capital, so ask about when repayments start and ensure you’re prepared accordingly. It’s like an invoice loan for small business.
There are many benefits when it comes to small business factoring, including:
Like any type of financing, there are some perceived negatives of small business factoring, including:
Before signing a financing agreement, it’s important to be clear on the pros and cons of financing an unpaid invoice and taking on business invoice loans as a source of business funding.
Some potential advantages of invoice financing for small businesses include:
Some potential negatives of invoice financing for small businesses include:
Small businesses use invoice factoring or financing to bridge cash flow gaps arising from slow-paying customers.
Slow payments affect your small business in two significant ways:
With the near-instant access to cash that invoice factoring offers, you can maintain positive credit ratings and a healthy cash turnover rate. Some ways factoring helps include:
We can’t make the decision for you, but we can give you the information you need to make the best choice for your business’ unique situation. Both invoice financing and factoring offer quick and easy access to capital.
Invoice financing is often the better option if your customer doesn’t accept factoring agreements and if you need funding more urgently than a few days.
Invoice factoring is better choice if you need higher funding limits (FundThrough offers unlimited funding!), don’t want to take on any debt, and don’t want to worry about repayments. (Full disclosure: FundThrough only offers invoice factoring.)
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 setups fees, service fees, or transaction fees – that can leave you with less funding than you planned for. See FundThrough’s pricing here.
Customer Service. Whoever you choose for your small business factoring needs should be invested in your success. At FundThrough, we offer dedicated account management, flexible solutions to get you funded, and treat your customer like our own.
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 working capital?
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 offers a short-term financing solution.
Do you have a timely opportunity that requires capital?
This could be a big project or a chance to buy in bulk. If you need cash to take on the opportunity, invoice factoring for small business could be right for you.
Did the bank reject you or refuse to raise your limit?
If the bank won’t work with you because you don’t have a long enough financial track record, because you need more capital than they’re comfortable with, or if you can’t wait months for an approval, invoice factoring could be right for you.
Are your customers credit-worthy?
If your customers are established businesses with strong credit, factoring companies are more likely to approve them, making it more likely for you to get invoices paid quickly.
Find out if you’re a good fit for FundThrough by getting started here.
Here are some things business invoice funding companies consider before offering you an advance.
Find out if you’re a good fit for FundThrough by getting started here.
Yes. Invoice factoring is secured by the invoices you issue to your customers. As a result, factoring companies will often 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.
FundThrough pays invoices in days for industries outside of this list as well.
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. Your customer pays the factoring company, rather than you paying back borrowed capital.
Recourse factoring is an invoice 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. Non-recourse factoring is often more expensive than recourse.
Interested in possibly embedding FundThrough in your platform? Let’s connect!