This is a sponsored blog post written by the team at Fit Small Business.
As a business owner, you often have to give payment terms to customers, allowing them to purchase your products and services now and pay later. While this can help you attract customers, it can also wreak havoc on your cash flow. That’s where invoice factoring can come to your rescue.
Through factoring, you can turn unpaid invoices into cash for your business. In this article, we’ll explain what invoice factoring is, how it works, and the cost.
What Is Invoice Factoring, And Should I Use It?
Businesses can grow only if they have a healthy cash flow. When you invoice customers, however, there’s a lag between the time an order is fulfilled and the time you receive payment.
Invoice factoring (aka invoice financing) allows you to get an advance of capital in exchange for your unpaid invoices. You can then use the money as working capital to hire new employees, expand your business, and take care of other expenses.
You may be a good candidate for invoice factoring if:
- You invoice other business or government clients and have been doing so for at least the last 3-6 months.
- You have unpaid invoices that are due in 90 days or less.
- You plan to factor invoices only from customers who pay on time.
- Your personal credit score is at least 530.
The Downside of Traditional Invoice Factoring
You may have heard or read negative things about invoice factoring. Traditionally, invoice factors contacted a small business’ clients to verify invoices and acted as a collection agency to collect from late payers. Understandably, this discouraged a lot of small businesses from factoring invoices.
Additionally, most traditional invoice factors required long-term contracts or expected you to factor a minimum volume of invoices. This prevented a lot of smaller businesses and newer businesses from using invoice factoring.
A New Breed of Invoice Factors
BlueVine and Fundbox are two newer entrants to the space that provide good financing solutions for cash-strapped small businesses. Much less intrusive than traditional invoice factors, BlueVine and Fundbox allow you to factor invoices while retaining control over your customer relationships.
Neither company will contact your customers for any reason, so your customers won’t know that you are factoring their invoices. You can choose how many and which invoices to submit for factoring; there are no long-term contracts or minimums. The best part is that BlueVine and Fundbox provide lines of credit. This means that as customers pay their invoices, you get access to that money again to factor more invoices. Many newer businesses and small operations rely on BlueVine or Fundbox as a regular source of funding. Here’s how they work.
How Does Invoice Factoring Work?
BlueVine gives you 85-90% financing upfront based on the value of your invoices. The rest, minus fees, is sent to you once the customer pays the invoice. You can get credit lines of up to $150,000 from BlueVine, with funding available in 1-3 business days.
- Example: Say you have a $10,000 invoice that is due in 30 days. BlueVine will advance you $8,500 up front. When the invoice comes due, your customer will send money to an account that BlueVine sets up in your business’ name, and BlueVine will send $1,000 of the customer payment to you. The remaining $500 it will keep as its fee.
BlueVine assigns an account number and payment address that are in your business’ name, so your customer can still make checks payable to you and won’t know that you are factoring their invoices.
Fundbox is another good option for businesses with unpaid invoices. Fundbox works like a traditional loan with weekly payments, providing credit lines of up to $25,000 in 1-2 business days.
- Example: Let’s say you have a $10,000 invoice that will be due 90 days from now. Fundbox will loan you the full $10,000. You have to pay back the $10K plus the fees charged by Fundbox over the next 12 weeks or less. The fees for a $10K invoice would be approximately $582 if you take the full 12 weeks to pay back the loan. If you took, say, only 6 weeks to pay it back, then your fee would be cut in half.
With Fundbox, your customers never really enter the picture. You receive 100% financing upfront and you pay back the loan week over week. Factors like your current cash flow scenario will help you to determine which is the best choice for your business.
In order to use Fundbox, you must use compatible invoicing software, such as Wave.
Cost of Invoice Factoring
When you convert the cost of invoice factoring to an annual percentage rate, it comes to about 30-60% APR. While this might seem really costly, it’s cheaper than many other forms of short-term financing for small businesses. So before you run out and get a short-term working capital loan or a merchant cash advance, check if invoice factoring is an option for you. Repeat clients, clients from certain industries (e.g. trucking), and larger credit lines also tend to qualify for better rates.
When evaluating the cost of invoice factoring, remember that the fees are often less than what you can achieve by unlocking the capital that’s currently tied up in your unpaid invoices. Instead of putting your business on hold until your customers pay you, you can use invoice financing to immediately buy inventory, hire workers, expand, or fuel business growth in other ways.
Consider invoice factoring if you invoice your customers but need cash to tide you over until they pay. It’s easy, quick, and cheaper than many other types of short-term business financing. For more details on how invoice factoring works, consult Fit Small Business’s In-Depth Guide to Invoice Factoring.
Priyanka Prakash is a business analyst and staff writer at Fit Small Business and Fit Biz Loans. She has experience working at a start-up and is interested in software and services that help small businesses succeed. Her areas of expertise include Help Desk software, small business lenders, and more. She can be reached at email@example.com
The information and tips we’re sharing in this article are meant to be a starting point for your year-end tax prep, so you can be informed and feel confident when working with your accountant. Be sure to check with a tax expert in your country or region for any specific advice you need, as each business (and tax district) is different. As our lawyers would say: “This article is for informational purposes only. It should not be considered legal or financial advice.”