In our research, we’ve found that 64% of small businesses routinely wait on late payments. While large receivables accounts might look great on financial statements, small businesses can’t exactly invest their outstanding invoices. Because it can be hard to qualify for small business loans, companies have traditionally relied on invoice factoring companies for temporary cash flow relief.
A small business with excess outstanding invoices sells them to a factoring company at a discount in return for fast cash, which is usually delivered within a few days. The factoring company then recoups its expenses when customers finally settle their accounts.
Factoring companies have been around forever. Still, there are a number of reasons small business owners might want to think twice about partnering with one. Here are three of them:
3 Things You Didn’t Know About Invoice Factoring
Invoice factoring companies can charge anywhere from 1.5% to 5% per invoice per month. Beyond that, many invoice factoring companies have fees hidden in their contracts: application fees, per-invoice processing fees, early cancellation fees, credit check fees, overdue fees, and more.
Altogether, small businesses can expect factoring companies to charge as much as a 60% APR. Though funding is short-term by design, chances are many small business owners will be able to find better rates.
Customers have to pay the factoring company directly
Once a small business sells its invoices, the invoice factoring company takes ownership of them—which means it collects payments from customers directly. Because it’s generally understood that companies use invoice factoring companies to solve their cash flow problems, customers will likely learn of the small business’ financial troubles. This is probably not the impression most small business owners want to give.
Compare that to invoice financing services like Fundbox which exist entirely in the background. Small businesses that use Fundbox may have cash flow problems of their own, but their customers will never find out unless they divulge the information themselves.
Small businesses often have to lock into long-term contracts
Many invoice factoring companies like to lock their customers into long-term contracts that may last as long as two years and require them to factor a specific number of invoices. This isn’t particularly helpful for small businesses that may be struggling with cash flow for a month or two and just need a little help. Before signing up for invoice factoring, small business owners should do their due diligence to see how long the contract terms are and whether there are any cancellation fees if the agreement is terminated ahead of time.
Instead of getting locked into a long-term contract, small businesses can use Fundbox on their own schedule. There aren’t any contracts to sign. Just choose the invoices you want to advance and start putting the money you’re owed to work right away. To learn more, click here.