Easy Invoice Factoring

[Queila Neubecker]

Everyinvoice factoring service operates a little differently. You may have heard of invoice factoring or invoice discounting, but with both you access funds from an unpaid invoice. With invoice factoring, you sell your unpaid invoices to the factoring company and they collect payment directly from your customers. You also likely will receive 60-95% of the invoice value, not the entire amount.

The main difference between Fundbox and invoice factoring is in the interaction with your customers. With Fundbox you continue to work with your customers directly. You also get the full value of the invoice deposited into your bank account right away. Use Fundbox when you need it most and continue to run your business and maintain client relationships as you always have.

For starters, Fundbox is very easy to use. You can register in seconds without any paperwork or personal credit check to get started. Choose to connect your accounting software and bank account or just your bank account by itself, and we'll give you a credit decision in hours. If you're approved and advance an invoice, funds arrive in your bank account as soon as the next business day.

If you find that cash flow gaps due to slow customer payments are restricting the growth or operation of your business, you might think that the solution would be to simply ask your clients to pay their invoices sooner. If only it were that simple.

Examples of factoring have been found as early as the ancient Roman Empire. In the early 1300s & 1400s, traders lent money against the delivery of trade goods. Merchants would trade this contract instead of the actual goods. Factoring has definitely been a part of doing business throughout the history of the United States. In the 1600s & 1700s when English colonists traveled across the sea to America, London would advance funds to purchase goods. While in the 1910s, the booming garment industry relied on invoice factoring to purchase raw materials to manufacture textiles.

Popular among small businesses, invoice factoring and financing are options worth considering for all types of businesses, regardless of industry. These type of financing plans work well for some growing businesses because they help make you unlock the funds you currently have sitting in unpaid, high-value invoices. If your business is struggling, this type of financing can also serve as a crucial lifeline by lowering your days sales outstanding (DSO) metrics, meaning you get your payments faster.

In this guide, you will gain a clear understanding of how invoice factoring and invoice financing works, so that you can evaluate and choose an appropriate identify which financing plan and company works best for your business.

Although every third party factoring company will have their own set of terms and conditions built into their invoice factoring plans, the basic structure of how all invoice factoring works will be approximately the same. Here are the basic steps you can expect.

Keep in mind that with invoicing factoring, you can only sell invoices that are payable within 90 days. If the payment term is any longer that that, your invoice may not be eligible for invoice factoring. When choosing whether to factor invoices, consider that the entire invoice factoring process can easily take a week, between the time you begin factoring to when you get your funds from the factor.

When choosing a factor, you should also think about the amount and frequency of invoices you want to sell. Many invoice factoring agreements require a regular, recurring arrangement. In these arrangements, you might have to agree to factor a certain amount of your invoices, to factor on a monthly or weekly basis, or some other schedule or minimum invoice value. If you do not stick to these terms, you could get hit with extra fees.

Once you have selected a factoring company that fits your needs and budget, they will review your business credit and transaction history, as well as the invoices you are factoring. They may ask you for a series of personal documents, as well as perform a personal credit check on you or your customers. The goal of this evaluation is to discover the reliability of your customers and the likelihood that they will pay the invoices on time.

After this review, if you are approved, you will sign a factoring agreement and begin the factoring process. The factoring agreement should outline any fees, details of the payment plan, and the initial maximum dollar amount that will be given to you. That amount would be the maximum factored amount outstanding at any time. It is important to read all terms and documents carefully during this part of the process. You might want to consult a lawyer specializing in small business finances who is familiar with factoring to go through the agreement paperwork and make sure you understand various potential scenarios, such as what happens if you need to delay a payment.

Once the agreement has been signed, the factor will give you an advancement called the advance rate. Normally, this rate is a percentage of your invoice value. The amount you receive is usually around 80% of the total invoice value, and would be outlined in advance in your agreement with the factor. The rate you get is generally determined based on your industry, transaction history, and stability of your business.

The number one determining factor that affects a company's eligibility in the eyes of a factor, is their customers themselves. Because factoring companies will be potentially taking on the financial risk and consequences of any unpaid invoices, factors want as much information as they can get to make a bet on whether your outstanding invoices will eventually be paid. There is always a possibility that some customers may not be able to pay their invoices, due to bankruptcy or poor planning.

Like any lender, factors do everything they can to avoid the risk of losing their capital. By asking you to provide information and answer financial questions about your invoices and customers, factoring companies are doing their due diligence to predict the potential loss they may face by agreeing to finance you.

Now that you have a taste of the level of background checks involved in invoice factoring, it is easy to see how this application process for invoice factoring can take over a week from start to finish. For that reason and many more as discussed later in this article, many businesses need a faster form of financing and turn to alternative lenders and credit solutions, instead of working with factors to sell their invoices. With alternative credit solutions like Fundbox, the application process only takes minutes, involves no paperwork at all, and can all be done online. The entire process can take as quickly as a couple hours, meaning, if approved, you can draw funds the same day, and receive funds as soon as the next business day.

The Factoring Period is the amount of time that a factoring company allows your customers to keep their invoices open. This information is relevant for you because it will affect the amount of fees you ultimately pay. Factors charge discount rates at regular intervals (typically weekly or monthly), so the factoring period, the length of time your customer takes to pay your invoice, will determine your final cost.

In addition to the discount rate and factoring period above, factoring companies may charge additional fees, all of which should be explained in your factoring agreement. These fees might include any but not limited to the following (or more):

Since there are hundreds of factoring companies available today, you can shop around and compare a handful of the most credible ones to find out which company best fits your business needs. Here is a list of things to consider before deciding which factoring company to choose:

You should also look into how long the entire factoring experience takes, from applying to receiving funding. In general, invoice factoring takes between 2 to 7 days, and funded approximately 1 to 3 business days afterwards. It can often take longer than this.

Recourse factoring is the most common type of factoring in the U.S. In recourse factoring, the factoring company is given the right to collect payment from you if your clients do not pay your invoice on time. This type of factoring can lead to additional fees for you, based on the amount of time it takes for your client to finally pay what they owe.

Finally, the last big consideration that might affect your decision is industry familiarity. You will probably want to choose a factor based on the industry it specializes in financing. For example, if you own a construction company, you will want to find a factoring company that is familiar with dealing with construction clients and trusted by other companies in your industry.

Invoice financing and invoice factoring have many similarities.However, there are few key differences that are relevant to your decision of whether invoice factoring or financing is a better fit for you.

Since invoice factoring companies, like any other lenders, take on the task of collecting invoices and sending your advancement without a 100% guarantee of receiving the funding back, factors consider their risks carefully. Applying for invoice factoring will require you to agree to a credit check on your customers. If your customers fail these credit checks, you may not be eligible for financing.

With invoice financing, a credit check isn't necessarily the main arbiter of creditworthiness, because fin tech invoice financing companies like Fundbox use sophisticated technology that helps us extend capital to businesses by taking into account many factors. The technology was built to evaluate small businesses based on their business information.

For example, with Fundbox, you could be approved for invoice financing in just hours. During the assessment, we determine whether we are able to approve you for credit and, if so, what your credit limit would be. Fundbox assess the health of your business based on your accounting software or business bank account data. Businesses who use our service are asked to link their accounting software (Clio, Ebility, FreshBooks, Harvest, InvoiceASAP, Jobber, Kashoo, PayPal, QuickBooks Desktop, QuickBooks Online, Xero, and Zoho) or bank account, not personal credit scores, when signing up for an account.

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