How Invoice Factoring Works

Did you know that more than 80 % of small businesses fail due to poor cash flow management? If your business is suffering from negative cash flow due to unpaid invoices, invoice factoring can help it get back on track. While traditional invoice factoring has some problems, invoice financing offers a discrete invoice advance.

Traditional Invoice Factoring:

With traditional invoice factoring, an invoice factor buys your invoices from you at a discount and gives you an infusion of capital in exchange. Your client pays the invoice factor directly. A lot of small businesses dislike traditional invoice financing because it can disrupt their client relationships. For example, the invoice factor may contact your client to verify the invoice and to collect payment on a late invoice.

Invoice Financing:

Invoice financing advances money to you in a much more seamless and small business-friendly way than traditional factoring.

If you need up to $100K in short term working capital, you can get financing equal to 100% of the value of your invoices with Fundbox. The financing is structured like a line of credit which you pay back over 12 weeks or 24 weeks. For example, if you have a $5,000 invoice that you’re awaiting payment on, you'd receive a $5,000 loan and must pay back that amount (plus fees of 0.5% - 0.7%) over the next 12 or 24 weeks. Opening an account with Fundbox in free.

If you need more than $100K in capital, the money you need will come to you in two parts:

You receive an upfront advance equal to 85-90 % of the invoice. For example, if you factor a $10,000 invoice, you will receive $8,500-9,000 right away.

You receive the remainder (minus the lender’s fees) when your client pays the invoice. Your client pays the invoice factor directly instead of paying you.

With this financing structure, there are no installment payments because the invoice factoring company gets paid when your customer pays the invoice. Some businesses prefer this because it gives them a large infusion of working capital that they can put to use right away without having to pay it back bit by bit.

Even though your customer pays the invoice factor, you still retain control over your customer relationships. The invoice factor won’t contact your clients, and all you have to do is tell your clients that your payment details (e.g. address, account number) have changed. Checks can still be made out in your business’ name. For this financing option, visit BlueVine.

It’s best to use invoice financing to factor invoices that you are fairly certain will be paid on time. If your clients are late to pay an invoice, that can shift the responsibility for payment on to you. If you’ve already spent the funds on something else, that could put you in a bind. However, as long as you use it for timely customers, invoice financing can be a great way for businesses, including startups, to stabilize their cash flow.

Also, it's always best to use expense-specific invoice factoring if possible. For example, there are staffing factoring options that are geared to help businesses with their short-term payroll needs.