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Invoice factoring vs. Fundbox.
Every invoice factoring service operates a little differently. You may have heard of invoice factoring or invoice discounting, but with both you access funds from an unpaid invoice. With invoice factoring, you sell your unpaid invoices to the factoring company and they collect payment directly from your customers. You also likely will receive 60-95% of the invoice value, not the entire amount.
The main difference between Fundbox and invoice factoring is in the interaction with your customers. With Fundbox you continue to work with your customers directly. You also get the full value of the invoice deposited into your bank account right away. Use Fundbox when you need it most and continue to run your business and maintain client relationships as you always have.
For starters, Fundbox is very easy to use. You can register in seconds without any paperwork or personal credit check to get started. Connect your accounting software and we'll give you a credit decision in hours. If you're approved and advance an invoice, funds arrive in your bank account as soon as the next business day. Read more about how Fundbox works.
If you have a business with slow-paying customers or a limited cash flow, you may be interested in learning about invoice factoring. Invoice factoring is a financing plan specifically designed for businesses that issue invoices with net terms usually between 30 to 90 days. With invoice factoring, businesses can utilize their unpaid invoices to secure immediate funding.
Instead of working with banks or lenders to receive traditional loans, invoice factoring involves a third party called a "factoring company" who offer and facilitate the financing.
Instead of offering a loan, factoring companies essentially “buy” invoices from your business by paying for them either in full or, in most cases, partial. The business owner receives a percentage of their advancement and the factoring company keeps the remaining amount as a form of collateral in the event that customers do not pay back their invoices. Factoring companies take on risk by factoring your unpaid invoices. They need to be certain that your invoices belong to high quality clients who pay on time in order for them to get their money back.
After the completion of this invoice “sale”, the responsibility to collect payments shifts. Instead of paying you, your clients will now be sending future payments and questions to your factoring company.
If slow payments hold back your business growth or operations, you may want to consider invoice financing. The reality is, many businesses have to offer competitive payment terms (aka "trade terms") in order to win their business. Asking clients to pay faster is usually not a realistic option. For that reason, many businesses with outstanding invoices turn to invoice factoring as the best option for tackling issues related to cash flow gap.
Invoice factoring has become popular among small- to medium-size businesses (SMBs) in recent years. SMBs often need cash to grow and establish their product market fit. In cases when a business is still young, it is sometimes not feasible to wait around for payments to come through as a source of funding. It is also typical in the early stages for smaller companies to come across unexpected expenses and certain events that may make running a business cost more than predicted.
Invoice factoring gives business owners the opportunity to avoid wasting valuable time and opportunities.
Here are some example of what cash flow coming from invoice factoring can do for your business:
Invoice factoring as a form of generating cash flow exists for hundreds of years. In the United States during the 1910s, the booming garment industry relied on invoice factoring for purchasing raw materials to manufacture textiles. Invoice factoring is an amazing way to support a business expansion through consistent cash flow.
Today, Internet access and technological development made factoring even easier and accessible for all businesses. A recent development that came out of invoice factoring is invoice financing, also known as accounts receivable financing, which will be described in further sections below. As you begin to learn about invoicing factoring, you will see that it is often compared to invoice financing, as they are both similar types of financing. You will also learn that many industries have already made invoice financing and factoring common practice in how they operate. Such industries include:
Fundbox is a leading service that is often chosen by SMBs in need of invoice factoring or invoice financing. Founded in 2013, Fundbox uses big data analytics, engineering, and predictive modeling to help optimize cash flow for small businesses and freelancers with outstanding invoices. At Fundbox, we offer businesses an easy, fast way to access capital by establishing a business line of credit for you upon a credit approval, so that you can borrow from your line of credit as often as you like within your available credit limit. Since our organization's launch, tens of thousands of businesses have adopted the Fundbox platform into their operations.
By the end of this article, you will take away a clear understanding of how invoice factoring and invoice financing works, so that you can identify which financing plan and company works best for your business.
While popular among SMBs, invoice factoring and financing is a great option for all types of businesses regardless of size and industry. These type of financing plans work great for growing businesses because it will help make your unpaid invoices work harder for you and not waste any time or opportunities to grow. If you are struggling business, this type of financing will also serve as a crucial lifeline by closing the gap between invoicing and receiving payments.
Every third party factoring company has its' own set of terms and conditions built into their invoice factoring plans. That being said, most traditional factoring companies often operate by the general structure below.
The first step of invoicing factoring begins with you sending out a bill to your customer to pay for the goods and services you provided. Your bill includes a deadline for payment as well as instructions on how to make a payment. You can begin searching for a factoring company and sell your invoices to them after this bill has been signed and agreed on.
Keep in mind that with invoicing factoring, you can only sell invoices that are payable within 90 days. If it is any longer than that, your invoice may not be eligible for invoice factoring. It would also not make any sense to sell invoices with too short of a deadline, such as a couple weeks, because the entire invoice factoring process can easily take a week between the time you begin factoring to receiving your first advancement.
Once you have selected a factoring company that fits your needs and budget, the factoring company will review your business as well as the invoices you are factoring. They may ask you for a series of documents as well as perform a credit check on your customers. The main goal of this evaluation is to verify the earning potential of your invoices as well as the reliability of your customers to pay the invoice back.
After passing this review, you will sign a factoring agreement and begin the process of receiving financing. This agreement will outline any fees, details of the payment plan, and the initial maximum dollar that will be given to you, which would be the maximum factored amount outstanding at any time. It is important to read all terms and documents carefully during this part of the process. If needed, you are welcome to consult a financial lawyer specializing in factoring to go through all the agreements and make sure you are protected in various scenarios, such as missed payments.
Once the agreement is signed, the factor will give you an advancement called the "advance rate". Normally, this rate is a percentage of your invoice’s value, usually 80%, but this rate would be outlined in advance and usually determined based on your industry, transaction history, and stability of your business.
Because invoice factoring will involve reassigning the receiver of your client’s bill, the company offering invoice factoring may send out a “notice of assignment” to your affected clients to inform of your invoice factoring plan and provide them detailed instructions on how to send future payments from invoices issued from you.
As soon as your invoice's deadline have passed and your client has paid the factor, the factoring company will send you any remaining balances, known as the "reverse amount". The factoring company will also deduct their service fee, or rebate, from the remittance. This fee is usually a percentage that was negotiated in the beginning during the drafting of the factoring agreement and this percentage is usually based on the invoice amount and the invoice due date.
Before you begin invoice factoring for your company, it is important to first complete the application process required by factoring companies to find out if your business qualifies for invoice factoring.
There are many components factoring companies look into within your company and invoices when determining the eligibility of your business to secure financing.
Out of all the criterias, the most determining factor that affect a company's qualification is the customers being invoiced. Because factoring companies will be potentially taking on the financial consequences of unpaid invoices, factoring companies need as much information as they can to gain the assurance that invoices will be paid. Regardless of how diligent they are in the screening process, there is always the possibility that some customers may not be able to pay their invoices due to bankruptcy or poor planning. It is realistic for factoring companies will to take on a slight debt from time to time, but they must do everything they can to avoid the risk of losing an enormous amount of capital.
By asking you to provide information and answer financial questions about your invoices and customers, factoring companies are essentially doing their due diligence to predict the potential loss they may face by agreeing to finance you.
Here are examples of the questions that factoring companies may ask you regarding the credibility and reliability of your customers during their evaluation:
Besides asking about your customers, factoring companies will also evaluate your own business to determine whether you yourself will be a reliable financing client for them. They look at the following criterias:
While your business’ credit score and revenue could influence your eligibility to receive invoice factoring, it is still more important for you to emphasize to factoring companies that your clients are reliable, pay their bills on time, and bringing in significant revenue. As long as any of the questions above are addressed with assurance, you should be able to secure the eligibility to undergo invoice financing.
Now that you have a taste of the importance background checks in invoice factoring, it is easy to see how this application process for invoice factoring can take over a week from start to finish. For that reason and many more as discussed later in this article, many businesses need a faster form of financing and turn to Fundbox for invoice financing. With Fundbox, the application process is free and can be all be done online. The entire process can take as quickly as a couple hours, meaning you can withdraw funds the very next business day.
Invoice factoring is not a free service. Once a factoring company agrees to work with you, you will need to pay them for their invoice services in the form of factoring fees. Usually, these fees are collected after your client has paid the invoice and then this fee would be deducted from the rebate. The terms of these fees are always discussed beforehand and included in the factoring agreements you sign with the factoring company. The fees are generally composed of two key components: the Discount Rate and the Factoring Period.
The transaction fee or the primary cost of doing business with a factoring company is know as the discount rate, or the factor rate. Depending on the factor and the factoring period, it could range from two to ten percent of the invoice. If you’re also dealing with a large amount of invoices within a given time frame, this rate could be lower. Always ask your factoring company about how their discount rate is determined, and what you can do to get the best rate.
As an example, if you have a $100,000 outstanding invoices due in 30 days and choose to factor it at a discount rate of 5%. You would receive $95,000 as your first advancement because the factor company has kept $5000 as their fee.
The Factoring Period is the amount of time that a factoring company allows your customers to keep their invoices open. This information is relevant for discount rates that are charged on a weekly or monthly basis. It’s important to set a realistic factoring period that works for you and your clients because if your clients do not pay back the invoice on time, the factoring company will begin collections from you to withdraw funding. It’s important to consider the length of time it will take for the customer to pay your invoice when determining your costs.
In addition to the discount rate and factoring period above, factoring companies may charge additional fees, including but not limited to the following:
As you calculate the total fees associated with invoicing factors, it may seem that the total is comparable to or even higher than the fees quoted in traditional financing, like bank loans. In traditional financing, the Annual Percentage Rate (APR) will be around 7% for long term financing and 30% - 120% for short term financing.
In some cases, you may find that the APR with invoicing factoring may cost more than traditional financing. However, chances are, getting the equivalent terms that comes with invoice factoring in traditional financing will cost much more. After all, invoice factoring allows you to access funds for a short duration and borrowing funds through traditional financing may cost more over the same time period since you would have to borrow funds for a full year.
Looking for a financing option with the most transparency? With Fundbox, the fees are flat and the total fee is evenly divided across the repayment period. When you repay your loan back early, the remaining fees will be waived, potentially saving you a lot of money. Fees start at 4.66% of the draw amount in a 12-week repayment plan and you will always see the weekly repayment and fees before you draw any funds. There are no origination fees, maintenance fees, or inactivity fees. Only pay fees when you draw from your line of credit. The fees come out to between $50 to $75 for a $1000 invoice. This rate will still be lower than the ones applied to any merchant cash advance offered by short-term bank loans.
As you begin to shop for factoring companies and compare the rates, please request that each company provides information about all fees required by the company. You should also make sure that all fees are outlined clearly in the contract, so that there are no surprises. If possible, it might also be helpful for you to consult a lawyer for a second look.
Because there are hundreds of factoring companies available today, it is important to shop around and compare a handful of the most credible ones to find out which company best fits your business needs. Here is a list of important considerations you should make before deciding which factoring company to work with:
A quick Internet search can reveal reviews and information about every factoring company. Please take note of the age of the company and reputation of the factoring company. Online reviews are really helpful in this area.
On the customer support side, it is also important to find out and ask the company about its customer support as your clients will be interacting with them. Find out how reliable they are in terms of how interacting with your clients and what the customer experience is like for clients of factoring companies.
You should also look into how long the entire factoring experience is from applying to receiving funding. In general, Invoice factoring takes between 2 to 7 days, and funded approximately 1 to 3 business days afterwards. If you are looking for a faster experience, you should consider Fundbox, which can can provide funding decision within 1 business day without any paperwork. By linking your account software to Fundbox, you can find out your eligibility within hours.
Another consideration is recourse vs. non-recourse factoring, which outlines scenarios when your clients do not pay your invoice on time. In recourse factoring, the factoring company is given the right to collect payment from you if your clients do not pay your invoice on time. This type of factoring can also apply additional fees for the amount of time it takes for your client to finally pay back. As you can imagine, this type of factoring is risky because it can potentially create new cash flow problems and put you in a position where you are unable to settle debts owed to the factoring company. Non-recourse factoring is ideal because this type of factoring makes the factoring company take on more risk and won’t penalize you if your client does not pay the invoice on time. Even if a factoring firm states they offer “non-recourse” factoring, you should double check the contract to see if they outline any criterias or “loopholes” where your invoice changes into to recourse factoring. Some factors may do a combination of the two and create partial-recourse agreements. Regardless of what the factors state, it is always important to read the contract carefully to see all the agreements associated with the event in which your client pay late or not at all.
The next consideration is finding out if the factoring company allows spot factoring or contract factoring. With spot factoring, a company can sell and assign a single, individual invoice to a factor. This is good for companies, but usually bad for factoring companies who have already put in so much work and time to work with you through the application process.
A single invoice also means that it may potentially not be a lot of money and would make you a lower value business that what you could be. Contract factoring means that rather than picking single invoices, factoring companies take on invoices based on value. So they would be looking at the requiring a minimum monthly volume, usually over $10K, or to direct all invoices to them.
Contract factoring is common, but less ideal for small business because they have a variety of clients who pay using different terms or may have changes in financing. There’s not a lot of flexibility in contract factoring. In that case, you should look into Fundbox, which lets you choose which invoices to clear and when to clear them.
Finally, the last consideration that might impact your decision is industry familiarity. In others words, picking a factoring company based on which industry it specializes in financing. For example, if you are a construction company, you will need a factoring company that is familiar with dealing with construction clients and trusted by competitors in your industry.
Trusted by over 70,000 small businesses across the U.S., Fundbox is a reputable example of a company that can help across multiple industries. They are have a reputation of excellent customer support.
As mentioned earlier in this article, while you are considering invoice factoring, you might also be interested in looking into invoice financing. Similar to invoice factoring, invoice financing is also a financing solution for fixing cash flow issues by receiving advances on invoices. Both invoice factoring and invoice financing involve a involve a third party company to help businesses turn unpaid invoices into cash flow opportunities.
There are a few more similarities which is why invoicing factoring is often compared with invoice financing:
However, there are few key differences that may affect your decision in figuring out whether invoice factoring or financing is a better fit for you.
Since invoice factoring companies are taking on the risk of collecting invoices and sending your advancement without a 100% guarantee of receiving the funding back, invoice factoring will involve performing a credit check on your customers. If your customers fail these credit check, you may not be eligible for financing.
With invoice financing, a credit check may not be necessary because financing companies have many tools to determine your customers’ reliability without a credit check.
For example, at Fundbox, you could be approved in a few hours. During the assessment, we determine whether we are able to approve you for credit and, if so, what your credit limit is. Fundbox assess the health of your business based on your accounting or bank account data. Businesses who use our service are asked to link their accounting software (Clio, FreshBooks, PayPal, QuickBooks Desktop, QuickBooks Online, Xero) or bank account, not personal credit scores, when signing up for an account. By looking at these account software, we can determine what the history of the customer's payment activities look like and determine your eligibility in hours, meaning that you can your advancement within a matter of days.
In invoice factoring, you are essentially selling or reassigning invoices to a third party company. The factoring company would then be communicating with your clients about their invoice and processing the payment.
The benefit of having a financing plan that comes with a complete credit control and collection service, enabling you to focus time and resources on other areas of your business.
This may cause some problems:
With invoice financing, instead of having your clients direct their invoice payments to the factoring the company, your clients will continue to direct their payments to you normally as if they would before you initiated invoice financing. This is an important aspect of invoice financing because with invoice financing, you will be in control of the sales ledger, payment chasing and invoice processing. At Fundbox, we don't want to interfere with your customer relationships, so we communicate directly with you, not them.
With invoice factoring, it is common practice for businesses to receive only a portion of your advancement of the invoice. After the client has paid the invoice in full minus the fees, the remaining advancement would be sent to the business. While this might be okay for some businesses, even losing out on a percentage of the advancement may still be detrimental to a business.
With invoice financing, 100% of the advancement can be given to you and you will be responsible for paying for the fees over time. In the case of Fundbox, you can receive an advancement as soon as the next business day. Fundbox provides credit limits up to $100,000.
While both invoice financing and invoice factoring are both known to be much faster than traditional bank loans, invoice financing is far faster than invoice factoring.
With credit checks and application processes, invoice factoring can potentially take a week or more to fund your invoices. Whereas with invoice financing, the online applications and tools can take only 2 to 3 days for you to receive your payment. In fact, Fundbox can give you a decision within hours to reduce the chances of you waiting a long period of time and finding out that you aren’t eligible to receive funding.
Usually, for small struggling businesses, factoring might work better because the factoring company will take over the sale ledger responsibility to free up time for you. If you are experiencing collections issue where your clients aren’t paying you, factoring is a good solution because it puts that responsibility on a third party experienced in collections.
However, if you simply need to get paid faster and do not want to deal with customers running away from you, invoice financing might be a better alternative for you and your customers. Now there are services like Fundbox which make invoice financing easier and faster than ever, more and more businesses are choosing invoice financing over factoring.
Another great reason businesses choose invoice financing over factoring is because financing tends to be more transparent in terms of their fees and policies. This transparency saves businesses from surprise expenses and gives them accurate predictions of future expenses. Invoicing financing is great for companies looking for more flexibility as they begin growing and experiencing changes.