There comes a time in the life of every small business when cash gets a little tight and decision makers look for outside sources of funding.
In these instances, many small business owners will hop on the chance to secure a loan. But not everyone looks forward to the process and time it takes to get approved for a traditional business loan—and that’s assuming you can get approved in the first place.
For small business owners who seek timely financing to invest in their business and cover their operating expenses, invoice financing may be a much more sensible funding option.
What is the difference between invoice financing and invoice factoring?
The terms “invoice financing” and “invoice factoring” are often used synonymously, though they’re not the same thing.
Keep reading to learn about the differences between invoice factoring and invoice financing to see which one makes the most sense for your business.
What is invoice factoring?
Invoice factoring typically requires small businesses to sell their unpaid invoices to a third party at a hefty discount. Believe it or not, factoring companies have been known to take as much as 40 percent of the value of an invoice as their fee. More commonly, however, factors charge 10 to 15 percent on each invoice.
Generally speaking, a factoring company will give you a slice of your unpaid invoice up front. Then they’ll repay the remainder of the invoice, minus their fee, when they collect payment from your customers.
This is a key consideration here. When you decide to move forward with invoice factoring, your customers end up paying the factoring company, not your business. This can be slightly embarrassing to say the least. Making matters worse, this also opens the door to the possibility that your customer will have a negative experience dealing with the factor you decide to join forces with, which could hurt your chances at doing business with the customer again in the future.
What’s more, some factoring companies might decide not to buy your unpaid invoices if your clients have bad reputations or suboptimal credit scores. In order to move forward with invoice factoring, you need to be able to prove that your clients are good for their money and are generating consistent revenue on a regular basis.
It’s also worth pointing out that invoice factoring companies are known to charge any number of additional fees—including origination and account setup fees, lockbox or service fees, incremental fees, unused line fees, monthly minimum volume fees, renewal fees, overdue or collection fees, credit check fees, non-recourse factoring fees, ACH transaction fees, and wire fees, among a myriad of other fees. These fees may not be disclosed clearly upfront and may require some digging to understand.
Add it all up, and it’s safe to say that you need to research your options and read the fine print before moving forward with invoice factoring.
How does invoice financing work for a company?
Commonly mistaken as invoice factoring, invoice financing allows you to borrow against your uncollected receivables. Instead of letting unpaid invoices collect dust and hinder your business, you can use an invoice financing service to advance payments on outstanding invoices.
In a way, it operates like an on-demand business cash advance against unpaid invoices. When you advance cash for unpaid invoices, you usually repay the advance, plus a small fee, within a certain time period.
With invoice financing, small businesses can get a revolving credit line against unpaid invoices without affecting their relationships with their clients. Rather than selling unpaid invoices to a factoring company and incurring the associated discount—and dealing with all the potential associated problems—invoice financing enables you to retain control over all of your invoices, only borrowing against the ones you choose.
That being the case, invoice financing allows small business owners to reclaim control of their cash flow. Instead of scrambling to put together money to pay bills each month, they get the peace of mind that comes with knowing funds are only just a click of the mouse or tap of the finger away.
In addition to helping small business owners pay regular operating expenses, invoice financing services can also give companies enough padding to develop new products; launch new marketing initiatives; buy new equipment and technology; open additional locations; and remodel their storefronts, restaurants, and offices, among other things.
Invoice factoring and invoice financing at a glance
|Invoice Financing||Invoice Factoring|
|Use Unpaid Invoices as Your Credit Line||Yes||No|
|Advance up to 100% of your unpaid invoices value||Yes||No|
|Use it as you need it||Yes||No|
|Sell your invoices to a third party||No||Yes|
|Lender may contact your clients directly to collect unpaid invoices||No||Yes|
Is invoice financing a good idea?
When it really boils down to it, it’s impossible to say whether invoice financing is a good idea for your business or not.
Every company’s financial circumstances are unique, and different financing options will make more sense than others based on specific situations.
That said, invoice financing tends to be a more affordable option than invoice factoring. It also gives you more control over your company’s image, since you can give you customers more time to pay instead of having to ask for payment immediately. And you’ll also end up collecting money directly from them whenever they settle their accounts instead of having a third party ask for money on your behalf.
Depending on the invoice financing solution you choose, you should also be able to get paid much sooner than you would by using a factoring service. Due to a longer application process and the due diligence the factoring company needs to do, it tends to take a week or more to receive funds through factoring. On the flip side, you should be able to get paid within two or three days using invoice financing.
How much does invoice financing cost?
Like any other financial instrument, invoice financing fees vary on a lender-by-lender basis. Generally speaking, however, this is one of the more affordable forms of small business financing because you’re borrowing against what you’re already owed.
Before you settle on invoice factoring or invoice financing, it’s worth exploring your other options.
For example, you may be able to overcome cash gaps simply by changing the way you invoice your customers. If you’re waiting until the end of the month to send your clients a bill, consider testing out whether it makes sense to invoice them once work is complete. This could accelerate payment timelines considerably.
If you’re interested in securing fast, flexible financing quickly, you may also want to consider applying for a business line of credit. If approved, you can borrow against your line of credit and only pay interest on the money you’ve taken out.
How can I get started with invoice financing?
Fundbox makes invoice financing easier than ever before. Creating an account is fast and simple. There is no long approval process or mountain of paperwork to fill out; you just need to enter in some basic business details. Next, click to connect your accounting platform such as QB Online or FreshBooks to your Fundbox account and provide your business bank account details. If approved, you’ll see your available invoices in your Fundbox dashboard. Select an invoice to advance, and voila, the funds are in your bank account as soon as next business day.
You can learn all about Fundbox short term financing rates here then have either 12 or 24 weeks—your choice—to repay the advance, plus a small fee. Repay early, and the remaining fees are waived.
Need money for your small business and have a stack of unpaid invoices piling up? Give Fundbox a try. Sign up here.
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Apply for funding and find out if you qualify today