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Small Business Invoice Factoring

At some point in a business’ time of operation, it will need an outside form of funding that goes beyond its standard revenue. If you’re a business owner and need quick cash but don’t want to take out a traditional business loan, invoice factoring might be the right option for you. This form of financing allows you to cash in on your unpaid invoices and repay the advance as your customers pay you.

What is invoice factoring?

  • How does invoice factoring work? Invoice factoring is a form of financing that allows small business owners to sell their unpaid invoices to an invoice factor in exchange for an advance on part of the amount. Once the customers repay the invoices, the lender will send you the rest of the amount, minus the fees for the advance.
  • What industries do factors work with? Factors work with small businesses who make more than $25,000 through invoices and need a form of consistent cash flow. This includes a wide range of businesses from small startups to construction companies.
  • What’s in the factoring agreement? Factoring agreements often come with a wide range of fees including origination, incremental, service, renewal and monthly minimum fees. Additionally, the agreement will include a required repayment period. Most invoice factoring is repaid within 90 days of the initial advance.

Invoice Factoring Options

BlueVine

BlueVine funds within one to three business days and offers advances of up to $5 million.


Invoice Factoring
Loan Amounts$20,000 to $5 million
APR Range15% to 68%
Repayment TermsUp to 13 weeks
Time to FundingN/A
Click “Check Rates” to apply to Blue Vine

Why BlueVine For Invoice Factoring?

  • High Loan Amounts: BlueVine’s advances range between $20,000 and $5 million.
  • Bad Credit: This lender is willing to work with borrowers whose credit scores are as low as 600.
  • Unpaid Invoices: BlueVine advances 85% to 95% of your invoice upfront.

Fundbox

Fundbox funds as quickly as the next business day and offers invoice factoring advances ranging up to $100,000.


Invoice Factoring
Loan Amounts$1,000 to $100,000
APR Range10.1% to 79.8%
Repayment Terms3 to 6 months
Credit ScoreNo minimum personal credit score required
Time to FundingA few minutes to several days
Click “Check Rates” to apply to FundBox

Why Fundbox For Invoice Financing?

  • Very Fast Cash: Fundbox offers some of the fastest funding rates in the industry, with advances becoming available within just 24 hours.
  • Unpaid Customer Bills: Fundbox will advance 100% of your unpaid customer bills to you, which borrowers repay within 12 to 24 weeks plus the fees.
  • Bad Credit, Avoid Credit Check: Fundbox bases its decision on the likelihood that your customers will pay you back, not on your personal credit score.  

Invoice Factoring Pros and Cons

Pros

  • Quick cash
  • Less dependent on credit score than other forms of financing
  • May give borrowers access to larger amounts than traditional loans
  • No collateral required
  • Steady cash flow

Cons

  • Shorter loan terms
  • Less repayment flexibility
  • Potentially higher cost than other forms of financing
  • Dependent on customers; If customers are slow to make payments, you might fall behind as well.

What are typical factoring rates & terms?

  • How much does factoring invoices cost on average? Invoice factoring fees typically range between 1% and 4% of each invoice per month. For example, if you sell a $10,000 invoice at a 4% rate, the company may advance you 60% of the amount ($6,000). When the full amount is paid, the company will take $400 and send you the remaining $3,600.
  • How is factoring cost calculated? The factoring cost is based on the value of the invoice, the advance rate and the fee schedule, combined with any other fees such as prepayment, late fees or origination fees.
  • What’s the factor’s advance rate? The advance rate is the amount of money that the invoice factoring company advances to the borrower prior to the customer paying the invoice.
  • How quickly can you get funds? In some cases, invoice advances may become available to the borrower as soon as the next business day.
  • Full Funding vs. Partial Funding: Most invoice factoring companies only offer partial funding, meaning that they send you a portion of the invoice’s value prior to the customer repaying the amount. Some companies, will, however send the borrower 100% of the value of the invoice before it is paid by the customer.

What goes into consideration?

  • Business Industry: Some invoice factoring companies specialize in specific industries. For example, a construction company might receive a better rate if they get sell their invoices to a lender that specializes in working with construction businesses.
  • Volume of invoices: Some lenders may require that you have a minimum amount of invoices before they work with you.
  • Net terms of the invoice: The net terms of the invoice are the full amount that is due for the payment, including fees.
  • Type of service: Similar to the impact that your industry has on the invoice factoring application decision, the type of service that your company offers will determine which invoice factoring company you should apply to. For example, certain lenders specialize in working with trade service or professional service companies.
  • Quality of clients: The invoice factoring service will also take a look at how likely your clients are to repay the invoices.

Are there hidden fees or extra costs?

  • Termination Fees
  • Monthly Minimum Volume Fees: Some factors may require that you meet a certain minimum set of fees each month. If you don’t meet this minimum, you may be charged.
  • Maintenance Fees:  You may be charged for keeping the factoring line open.
  • Due Diligence Fees: The lender may charge you for evaluating your application.
  • Origination or Account Setup Fees: There may be fees for establishing the invoice factoring line.
  • Lockbox or Service Fee: A factor may charge a lockbox or service fee for keeping an account open to receive the payments.
  • Incremental Fee: This is a small fee that the borrower has to pay when the discount rate is a flat fee.
  • Unused Line Fee: This is applied when you have a factor line but are not using it in a particular payment cycle.
  • Renewal Fee: This is a fee that is charged for renewing the factor line for another year.
  • Overdue or Collection Fee: This fee is charged when your customers do not pay you in the time allotted to repay the advance.
  • Credit Check Fees: You may be charged for a credit check when you apply.
  • Non-recourse Factoring Fee: A non-recourse fee is what a company will charge if you have a non-recourse clause in your agreement, meaning that you’re not liable if your customer doesn’t pay the invoice.
  • ACH Transaction Fee: Some companies may charge for an ACH transfers.
  • Wire Fee: There may be a fee if you want the company to wire you money, or you want to wire the payment.

What is the difference between invoice financing and invoice factoring?

With invoice factoring, a company sends you a portion of the advance and takes control of the invoice collection process. After the customer pays the invoice, the company sends you the rest of the funds, minus the fees.

Invoice financing allows companies to maintain control of their invoice collection process and deal with customers directly, which can be beneficial to companies who depend on maintaining strong client relationships.

How is Invoice Factoring Different from a Bank Loan?

Do banks do factoring? Most traditional banks do not offer invoice factoring services. This form of financing is seen as an alternative to a traditional bank loan.

What is needed to start invoice factoring?

Can I start invoice factoring if I already have a business loan or line of credit? While lenders do take existing debt into account when evaluating your eligibility for invoice factoring, most of the decision is based on the amount of unpaid invoices you have and the likelihood that your customers will pay you back. Invoice factoring can be a viable way to get additional funding even if you already have unpaid loans or lines of credit open.

Credit Considerations

  • Is there credit risk involved with invoice factoring? While a decision to issue an invoice advance is based on more than just your credit, if your customers fail to pay you within the repayment period, this can reflect negatively on your credit report.
  • Credit Check vs. No Credit Check: Most lenders will require a credit check on both you and your customers. If your customers fail this credit check, your application may be rejected.

What types of factoring services are offered?

  • Spot factoring vs. Whole Ledger Factoring: Spot factoring allows you to sell individual invoices to a third party company, while whole ledger factoring allows you to sell the entire sum of your unpaid invoices.
  • Spot Factoring or Contract Factoring: Contract factoring is ideal for companies who are working on contracts and waiting to get paid from those contracts. Spot factoring can apply to any kind of business waiting on a payment.
  • Recourse vs. Non-recourse: A recourse agreement holds the borrower personally liable for all of the debt, while with non-recourse funding, once the lender has seized any assets offered as collateral including the total amount of all paid invoices, the borrower does not have to cover the difference.
  • Factoring vs. Invoice Financing: Invoice financing allows the borrower to maintain control of their collections and deal with customers directly, which can be beneficial to companies who depend on maintaining strong client relationships. With invoice factoring, a company will send you part of the advance, and will take control of the collections process. After the customer pays the invoice, the company sends you the rest of the funds, minus the fees.
  • Reassigning Invoices vs. Control of Invoices, how to let clients know: If you value your customer relationships but need to turn their invoices over to a factoring service, you may want to let them know first. Before turning their invoices over to a factoring company, you can use mail, telephone or email to contact them and give them another chance to repay what they owe you. This way, they will not be taken by surprise when they are contacted by a third party.

Conclusion

Invoice factoring and financing can offer a good alternative to traditional bank loans. If you’re a retailer, construction company, or other business in need of a steady cash flow, selling your unpaid invoices to tide you over through the revenue cycle can be a lower cost option than using a personal or business loan or line of credit.

See Also: Construction Business Loans

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