Invoice financing allows you to get money now in exchange for invoices that will be paid to you in the future. It can be a great way for small businesses to plug gaps in cash flow while they wait for customers to pay them.
Traditional invoice factoring requires your customers to pay a factoring company directly and the company contacts customers and collects on invoices. In most cases, you’ll need to process $50K of invoices with them on a monthly basis. Invoice discount providers (aka AR financing) are generally less intrusive, customers continue to pay your business directly, and you can use them to process far smaller amounts of invoices (as little as $1,000).
If you’re looking for a flexible financing option based on your accounts receivable, you should check out Fundbox. They offer no credit check invoice financing for between $1K – $100K with weekly rates as low as 0.5%. Prequalify online in minutes.
Traditional Invoice Factoring Vs. Invoice Discounting
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What is Invoice Financing?
Invoice financing (aka accounts receivable financing) is used by a variety of businesses, such as construction companies and professional service firms, that don’t get paid immediately after completing a job. Invoice financing companies will loan you money now in exchange for invoices that are due in several weeks or months. The money can be used for any business purpose.
This type of financing is open to almost any business that bills other business or government clients via invoice. Typically, you can qualify even if you’re a new business or don’t have a great credit score. This makes invoice financing a more viable option for a lot of small businesses compared to a bank loan or a line of credit.
Most lenders charge 1.5 to 5 % per month for invoice financing, which equates to an Annual Percentage Rate (APR) of 28-60 %. This makes invoice financing cheaper than some other business financing options, such as short term loans and merchant cash advances.
In order to use invoice discounting or factoring, your invoices should be due in 90 days or less. Your customers should also be trustworthy, timely payers because if they don’t pay, you are responsible for settling the debt with the financing company. This can be a problem if you’ve already spent the money.
Invoice Factoring vs. Invoice Discounting
There are two types of invoice financing: traditional invoice factoring and invoice discounting. Traditional factoring offers larger amounts of capital, but it also tends to be costlier, and you have to be ok with the factor contacting your customers. Invoice discounting offers smaller amounts of capital but at lower rates, and it doesn’t require client contact.
Traditional Invoice Factoring
Traditional invoice factors require you to “assign” your invoices to them, meaning that your customers must pay the factor directly instead of your business. After receiving payment, the factor will subtract its fees and release the balance to you.
The factor will contact your customer to verify the invoice and identify themselves as the new payee. If the customer doesn’t pay the invoice on time, the factor will, like a collection agency, maintain contact with the customer until the customer pays.
Obviously, a lot of small businesses dislike this system because it can disrupt their customer relationships and takes control over the payment process out of the business’ hands. On the flip side, some small businesses without accounts receivable staff appreciate the fact that the factor will handle debt collection on their behalf. Slow-paying customers can drain a small operation of time and money, so having a factor that doubles as a collection service could be a good thing.
Traditional invoice factors typically loan a lot more money than invoice discounters. For example, Commercial Capital loans up to $10 million for unpaid invoices. In contrast, you can only borrow up to $150,000 with BlueVine and Fundbox, our recommended invoice discounters.
The catch is that most traditional factors will only work with businesses that do a minimum amount of invoicing or are willing to sign long term contracts. This might work well for your business if you do a large amount of invoicing and need ongoing access to capital. However, if you only occasionally need to clear an invoice, signing a long term contract will increase your costs because it forces you to borrow more than you need.
On the surface, the rates charged by traditional factors may appear to be cheaper than a service like BlueVine or Fundbox. However, upon closer review, there are often hidden fees and costs. For example, traditional factors may charge ACH fees or overdue fees or require you to set up a reserve account as security in the event the customer doesn’t pay. Moreover, long term contracts and minimum volume requirements make borrowing more expensive.
Invoice Discounting: Confidential Factoring
Invoice discounting is often referred to as “discreet factoring” or “confidential factoring.” Like factoring, invoice discounting gives you money in exchange for unpaid invoices. However, it gives you more control over your invoices and customers.
Fundbox and BlueVine are examples of invoice discounters. Neither of them will contact your clients, and your clients won’t be aware that you are submitting their invoices for funding. In addition, neither company has minimums or requires long term contracts, so you can clear as few or as many invoices as you’d like.
These lenders also have a fast and easy online application process, getting you funding in as little as 2-3 business days. In contrast, traditional factors can take a week or more to fund your invoices.
BlueVine: Recommended for Businesses Needing More than $25K
BlueVine extends you a line of credit based on your unpaid invoices. You can get credit lines ranging from $5,000 to $150,000, making this a good choice for businesses needing larger amounts of capital.
BlueVine loans you money in two parts. Let’s say you are an architect and are waiting for a customer to pay you on a $40,000 invoice. BlueVine will advance you 85 % of that ($34,000) upfront. You can use that money as working capital, to hire new employees, etc. When the invoice is due, the customer will pay BlueVine directly. On the same day that it gets paid, BlueVine will deduct its fees and pass the balance along to you.
While this sounds like traditional factoring, BlueVine maintains the confidentiality of the transaction. BlueVine assigns you a checking account number and local P.O. Box address, both in your company’s name. Since the account is in your business’ name, your customers can continue writing checks to your business and won’t know that you are submitting their invoices for financing.
If your customers don’t pay BlueVine on time, BlueVine won’t attempt to collect the debt. If the customer is more than 2 weeks past due, it becomes your responsibility to pay BlueVine.
BlueVine rates start at 5 % per month, but repeat customers and larger credit lines qualify for better rates. In addition, businesses in certain industries like trucking get better rates. The APR ranges from 28-60 %, making BlueVine cheaper than most merchant cash advances and short term loans.
Fundbox: Recommended for Businesses Needing Less Than $25K
Fundbox gives you a short-term loan based on the value of your unpaid invoices. You can borrow between $500 to $25,000, making this a good choice for small businesses that don’t need much capital.
Fundbox will loan you 100 % of your unpaid invoices upfront. For example, if you have a $5,000 unpaid invoice from a customer, you can get a $5,000 loan.
You must start paying back the loan plus the interest right away in weekly installments, and it must be paid back in full within 12 or 24 weeks. Some businesses may prefer to get 100 % of their invoice financed up front and pay back the money a little at a time. Those who can’t afford to make weekly payments might prefer BlueVine’s model, getting a major chunk of the money (85-90 %) upfront and the remainder when the customer pays.
The fees on a Fundbox loan range from approximately $52 to $72 on a $1000 invoice. This equates to an Annual Percentage Rate (APR) of 38-54 %, which is cheaper than most merchant cash advances and short term loans.
Invoice financing lets you free up the cash that’s tied up in your unpaid invoices. For small businesses that have an ongoing need for capital and don’t mind the factor contacting their customers, traditional invoice factoring may be a good solution. If you want to retain more control over your invoices and can’t commit to a long term contract, then invoice discounting from BlueVine or Fundbox may be a better choice.
Fundbox offers no credit check invoice financing for between $1K – $100K with weekly rates as low as 0.5%. Prequalify online in minutes.