Overview of Invoice Factoring
It’s typical for small businesses to bill clients via invoice but only get paid 30, 60, or even 90 days later. With invoice factoring (aka accounts receivable factoring and invoice financing), you can plug the hole in your cash flow by receiving capital now in exchange for the outstanding invoices. The invoice financing preferred by FitBiz Loans differs from traditional invoice factoring. Rates start as low as 0.5% - 0.7% per week. You repay over 12 or 24 weeks. Your clients won't be contacted, and your clients can continue to make payments to you.
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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 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.
Will I Qualify for Invoice Factoring?
The qualification requirements for invoicing factoring are pretty straightforward:
You must bill other business or government customers (e.g. so retail invoices to consumers aren't eligible).
The invoices should be due in 90 days or less.
There shouldn’t be other business liens on the invoices.
Your clients should be creditworthy and have a history of paying invoices on time.
There may be other requirements, such as a minimum credit score (check your score for free here) or time in business, but these usually aren’t too onerous. Most of the time, even new businesses are able to qualify for invoice factoring if they have creditworthy clients.
Cost of Invoice Factoring
We offer a unique type of invoice factoring, where you will be a charged a one-time fee only (no ongoing fees). Rates start as low as 2.5 % for a 30 day invoice.
We can also arrange invoice factoring in which you're charged on a weekly basis, with fees starting as low as 0.5 % per week. Cost tends to decrease as a business factors more invoices and builds up a good borrowing history.
Here's an example: if you factor a $7,000 invoice at a rate of 0.5 % per week and your client takes 30 days to pay the invoice, your fee will be $140. If your client, on the other hand, took 60 days to pay the invoice, your fee will be double that amount.
When you convert the cost of invoice financing to an Annual Percentage Rate (APR), it equates to about 25-60 % APR.
Maximum Loan Amount
25-60 % APR
As fast as 1 business day
May be required as security if your client doesn’t pay the invoice.
Have a question?
Helps stabilize your business’ cash flow.
Available for startups and business owners with low personal credit scores.
Quick way to obtain funding.
You can apply electronically with virtually no paperwork.
You can get up to 100 % financing up front.
Only available for B2B or Business2Government businesses.
Can be expensive to start (repeat customers and larger invoices get better rates).
Customer may have to pay invoice factor directly but usually remains unaware that you are using invoice financing.
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