Invoice Factoring for Small Business

What is invoice factoring?

Invoice factoring is a way to get your invoices paid early by a third-party company.

How does invoice factoring work?

Imagine you are a construction company that has recently completed a renovation for another large company that has a net 60-day payment policy. This invoice is for 50% of the project, so a significant amount, and you need the cash to start your next project.

You don’t want (or can’t) wait for them to pay, so you “sell” the invoice to an invoice factoring company. The invoice factoring company “buys” the invoice from you (usually for a percentage of the full invoice amount) and you can move on with your business. They collect the payment from the company you invoiced.

Featured Invoice factoring options

Fundbox

✔ Funding: Borrow $2,500 - $150,000
✔ Minimum Credit Score: 600
✔ Loan term: 12-24 months
✔ Funding turnaround: as fast as next business day

Fundbox requires minimal documentation and access to a revolving line of credit without origination or maintenance fees. Borrowers are not required to have collateral (with exception of larger credit lines which are subject to a personal guarantee).

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BlueVine

✔ Funding: Borrow $5,000 - $250,000
✔ Minimum Credit Score: 600
✔ Loan term: 6-12 months
✔ Funding turnaround: 24-48 hours

With BlueVine, borrowers can get approval as fast as 24 hours and obtain a business line of credit for short term capital needs while only paying interest on the funds you borrow.

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What type of companies use invoice factoring?

Any company that invoices their customers on net-30 or net-60 day terms is eligible, especially if they work with medium and large-sized companies, but it lends itself better to some industries than others. Companies that often use invoice factoring are:

• Trucking and freight companies
• Construction companies
• IT companies
• Staffing agencies & security guard services
• Wholesale companies

Is invoice factoring a loan?

No. You are essentially “selling” the money you’ll get in the future, though you do pay for the pleasure. So, instead of getting 100% of the invoice amount from your client in 60 days’ time, you’ll get 95% of it (though your percentage may be more or less than this).

If your client didn’t pay the invoice, you would have washed your hands of the situation and it would be up to the invoice factoring company to chase the client for the money.

What are the different types of invoice factoring?

There aren’t really different types of invoice factoring, just different names for it. You may see invoice factoring called:

• Debt factoring
• Accounts receivable factoring
• Invoice discounting

What are the pros & cons of invoice factoring?

PROS

• It’s easy to get approved for invoice factoring because you aren’t asking for a loan or relying on your credit score to get the money you need
• Approval is typically very fast, especially if it’s a company you work with often
• You don’t need to offer up any collateral, since the invoice itself is worth the money you’re accessing
• You get paid on your terms, rather than waiting for another company’s finance department to get around to it

CONS

• You often lose your profit margin, because you likely didn’t add 1-5% of costs onto the invoice to allow for invoice factoring fees, so you may find you make very little on the job overall
• Invoice factoring companies only work for those who invoice their clients
• You essentially wash your hands of the client, which may turn them off from working with you again in the future
• You need to make sure you’re not working with recourse factoring service, or you’ll have to buy back the invoice if your client tries to avoid paying

What are the costs associated with invoice factoring?

In most cases, the invoice factoring company will charge you 1-5% of the invoice total. For example, if your invoice was for $100,000 and the charge was 5%, you would get paid $95,000.

Generally, the costs are based on the terms of the invoice (how long the company may need to wait to be paid by your client) and how likely they are to pay. For example, if the company you did work for was McDonald’s, you’d likely get charged less because it’s highly likely you’ll get paid. However, if they’re a smaller company that is unknown, you might find yourself with higher fees.

Something you need to be aware of is that this charge will usually build month-on-month. So, if you sell an invoice for a company you’re worried will disappear and they do, you may find yourself getting charged as the invoice factoring company struggles to get their money. Make sure you read the terms carefully before you sell an invoice so you know how much you can be charged if your client tries to avoid payment.