What is Factoring Financing?
Small businesses can frequently find themselves in a financial pinch while waiting on customers to pay their invoices.
As a business owner, you may feel like you’re constantly watching the clock tick, hoping someone will pay their bill so that you can finance your daily operations.
In fact, late payments not only impact your ability to keep the lights on, they can also affect future orders.
If you don’t have the working capital to cover production costs of another client’s order, your business could seriously suffer.
That’s where invoice financing comes in.
This unique short-term financing product allows you to get paid early for invoices.
Keep reading to find out how the process works, how to qualify, and whether invoice factoring is right for your small business.
What is a factoring company?
Invoice factoring companies help small businesses to limit cash flow issues due to unpaid customer invoices.
Your chosen company typically gives you a cash advance of 80% of the invoice amount to help you to continue to fund your daily operations.
Once the invoice is paid, you’ll receive the remaining balance with a certain percentage deducted.
Factoring companies generally charge between 1% and 3% of the invoice total.
You may also incur additional fees that accrue weekly if your customer doesn’t pay by the due date.
In essence, factoring is like a short-term loan for your business’s financing needs.
Working with a Factoring Company
Say you factor an invoice for $10,000.
The factoring company will pay you $8,000 upfront.
Then, assuming you pay a 3% fee and your customer pays on time, you’ll then receive the remaining $1,700 — that subtracts $300 as your cost.
Minimum Accounts Recievable
Some factoring companies require certain invoice minimums, either in the number of invoices you sell to them or the amount that they total.
Many also require that you sign an ongoing contract for them to service your invoices.
Be sure to carefully read the terms of any contract you sign to make sure there aren’t any exorbitant cancellation fees.
You could also encounter an origination fee for getting started, a lockbox fee, an unused line fee, a monthly minimum volume fee, renewal fee, and ACH or wire transfer fees.
Don’t be afraid to ask questions to make sure you understand the total cost of factoring with a specific company.
Another point to consider is that factoring companies typically take over your invoicing communications with your customers.
Depending on your business model, you may prefer this burden to relieved, or you may be wary of losing that connection with your clients.
It really just depends on how you like to work.
It’s possible to save on your total costs in a couple of different ways, depending on the company you choose.
You could receive a discount rate by bulking together more invoices.
You may also receive a discount if it takes your customers a shorter amount of time to make a payment.
Who qualifies for small business factoring?
There are a few things that need to happen in order to qualify for invoice factoring.
As part of the application process, you’ll need to submit a number of documents to demonstrate the viability of your business.
These can include:
- Profit and loss statement
- Personal and business tax returns
- Accounts receivable aging report
- Accounts payable aging report
While the financials of your business are important, a factoring company also heavily weighs the credit of your customers.
After all, they’re the ones who actually owe money, and if they don’t pay their bills, the factoring company doesn’t get paid.
So they may run a credit check and perform other due diligence research on the customers who have outstanding invoices.
What factoring companies work with small businesses?
There are a number of factoring companies to choose from, but be sure to choose one with a solid, well-known reputation to avoid any unsavory surprises.
And before your decision, make sure you’re fully aware of all the costs and fees for the entire factoring process, from start to finish.
To get started, check out some of the best known factoring companies.
Fundbox is a unique company because they actually fund the entire invoice amount upfront, rather than the traditional 80%.
They also don’t communicate with your customers, so you get to keep control of those relationships.
You choose the amount you want to draw, and then pick a repayment plan of either 12 or 24 weeks.
If you repay early, your fees could be prorated, so timely payments are actually rewarded.
Loan applications can range from as little as $100 to as much as $100,000 and you can get your funding in a short amount of time — often the next business day.
If you like to manage your customer invoices yourself and want flexibility in your repayment terms, check out this Fundbox review to see if it could be an ideal fit for your business.
Bluevine advances its customers between 85% and 95% of the invoice amount upfront, which is higher than the industry standard.
Many business owners like that Bluevine is completely digital and integrates directly into your accounting software, such as QuickBooks, FreshBooks, or Xero.
It’s good for business with high volume because you can factor as much as $2.5 million.
The minimum is $20,000 so it’s not ideal for smaller businesses.
You could receive an application decision within 24 hours and then it only takes a day or two to get the funds deposited directly into your business account.
You can read our Bluevine review here if you want to learn more.
Dealstruck is another company that doesn’t take away your customer relationship management.
Instead, you get to keep a close eye on exactly what’s going on with your accounts receivable.
Simply log onto your Dealstruck account at any time and see whose payments are still outstanding and what your current balance is.
Rather than traditional factoring, you can receive a line of credit to borrow against, that is then repaid by your customers.
You need a year of business history, a 600+ credit score, and $150,000 in annual revenue to potentially qualify.