Have you considered invoice factoring or invoice financing for your business? If so, you’re not alone. It’s no secret that many small businesses suffer from cash flow problems. In fact, research suggests 60% of small businesses face cash gaps every year.
There are many reasons as to why that’s the case. Operating costs can shoot up overnight as supplies and utilities increase unexpectedly. A major snowstorm could force a retailer to shut their doors for a few days, making it impossible to generate revenue during that period. Business might be slower than normal, causing a lot of cash to be tied up in inventory for longer than planned. The list goes on.
One of the biggest causes of cash flow problems is late payments. According to our research, 64% of small businesses are affected by late payments. Businesses in these situations have already delivered the goods or provided the services to their customers. They’re just waiting for checks to come in.
While a padded receivables account might look great on the balance sheet, you can’t exactly pay your bills with unpaid invoices.
Instead of taking on debt, however, many small business owners who are waiting on checks to come in decide to finance their operations either by selling their receivables at a discount through a process known as invoice factoring or by borrowing against their own assets in partnership with an invoice financing company.
Believe it or not, factoring can trace its roots to some of the world’s earliest civilizations, like Phoenicia and the Roman Empire. Merchants have been using factoring, in one form or another, to finance their operations for thousands of years.
The rise of fintech, however, has given small business owners several more modern options—like invoice financing.
Invoice financing is a relatively new small business funding option that has emerged over the last few years. Despite its newness, thousands of companies from all over the world are turning to invoice financing solutions to overcome the cash crunches they face—with ease, too, since the whole process is all online. Today, invoice financing is used by all sorts of small businesses—from construction companies to creative agencies to painting businesses and everything in between.
If your small business is facing cash shortages and you have a lot of unpaid invoices, invoice factoring or invoice financing may be the perfect solution for your company.
Which form of financing makes the most sense for your situation? To answer that question, you’ll need to weigh the pros and cons of each.
The Pros of Invoice Factoring
Invoice factoring is one of the fastest and easiest forms of small business financing around today.
Once you’ve determined which invoices you’d like to sell, the factoring company will assess your customers’ creditworthiness. Assuming they like what they see and agree to buy the invoices, you can expect a 70%–85% advance in as fast as 24 hours—solving your cash flow problems quickly.
What’s more, you don’t have to put up any collateral to secure an advance. You can also qualify for factoring even if you have bad credit.
Finally, invoice factoring companies collect payments directly from your customers. Since your business won’t have to repeatedly follow up with them to find out when you can expect payment, you’ll have more time on your hands to focus on growing your business.
The Cons of Invoice Factoring
On the flipside, invoice factoring can be prohibitively expensive. Financing costs will take a chunk out of your profits, between your factor rate, service fees, origination fees, credit check fees, and whatever other fees the factor you work with decides to charge. (For a more detailed list of the types of fees you might typically encounter, see our guide to invoice factoring.)
Factoring companies collect payments directly from your customers. Since most businesses only work with factoring companies when they have cash flow problems, deciding to partner with one will likely expose your financial situation to your customers—which may encourage them to consider their options.
Some factoring companies may require you to enter into long-term contracts with them, forcing you to work with them on a majority of your invoices—if not all of them. Factoring may also cause you to lose some control over your business, as factoring companies tend to prevent their clients from working with specific customers who they believe are unlikely to be able to repay their balances.
The Pros of Invoice Financing
Like factoring, invoice financing is an incredibly quick form of small business funding.
You can sign up for an invoice financing service like Fundbox in a few minutes and—after connecting your accounting software—be approved for financing in as soon as 3 minutes.* After selecting which invoices you want to advance payment on, funds can appear in your company’s bank account in as fast as one business day. You then have either 12 or 24 weeks to repay the advance, plus a transparent flat fee. If you repay early, the remaining fees are waived.
Invoice financing enables you to solve cash flow problems. Unlike factoring—which only gives you a fraction of the cash you’re owed—invoice financing services advance the full value of your invoices, giving you the money you need to bridge cash gaps and take your business to the next level.
With Fundbox, you don’t have to put up any collateral to secure financing, either. You’ll still collect payments from your customers directly, so they won’t know about your cash situation unless you tell them.
The Cons of Invoice Financing
Depending on the financer, you’ll need to meet some specific criteria to qualify for invoice financing.
Fundbox, for example, requires customers to have specific accounting software in order to use the service. With over a dozen integration partners, though, odds are your small business is already using a compatible app.
Additionally, Fundbox requires you to have a healthy transaction history in your accounting software. You can’t open a startup business today and get approved for invoice financing tomorrow. If you’ve been in business for at least two months and have a solid financial history, though, you have a better chance of being approved.
Since you’re drawing funds against your own outstanding receivables, there will be a limit to how much money you can draw at any given time. Keep in mind, however, that you’ll get 100% of the value of the invoices you choose to borrow against (up to your credit limit) whenever you need money.
Still not sure which form of small business financing makes the most sense for your business? Check out this guide we put together to make the decision-making process easier for you.
Want more in-depth info about invoice factoring vs financing? Start here.
* Based on the average decision time for Fundbox customers.