Learn whether invoice factoring can help your startup
Until it’s paid, an invoice is just a piece of paper and an entry on a ledger. The true value of an invoice is in the cash that you’ll receive for it – eventually. For many businesses, the time between issuing an invoice to a customer and the time the customer pays can seem like an eternity. During that time, you may have bills of your own that you need to pay, employees who need their paychecks and other obligations that cannot wait until your customer ponies up.
What is Invoice Factoring?
Enter invoice factoring. Many small businesses use this financing technique to quickly turn their unpaid invoices into cash. The concept is simple: you sell your unpaid invoices to a factoring company which will then receive the amounts due directly from the customer. In exchange, the factoring company will immediately pay you most, but not all, of the face value of the invoice.
For example, if you invoice a customer for $10,000, you could sell that invoice to a factoring company for $9,700 ($10,000 – a 3% fee; most fees are between 1% and 5%). The company would immediately pay you around 85% of the face value of the invoice and will pay the remaining balance (minus the fee) when the bill is paid. But be careful, there may be additional fees like application, processing, or credit check fees which will further decrease the amount you will ultimately receive for each factored invoice.
How much the factoring company will take off the top of your invoice depends on the amount of the invoice, your sales volume, and your customer’s creditworthiness. Factors can be “recourse,” which means you may have buy back the invoice if the customer fails to pay, or “nonrecourse,” which means that the burden of a default falls on the factoring company, though you may have to pay a higher fee upfront given the increased risk the factoring company takes.
Invoice factoring advantages and disadvantages
Factoring can be a great way to get quick cash and keep your cash flow steady without having to jump through the hoops or provide the collateral involved in other forms of financing. However, you could lose a substantial amount of the value of your invoice, lose control over the collection process, and may be on the hook for the advanced amounts upon default.
Invoice factoring platforms are a modern alternative to traditional factoring
Many small businesses interested in factoring are turning to a relatively new alternative, Fundbox. Through this platform, which is used by over 100,000 businesses, companies share and integrate their financial information with Fundbox by connecting their Quickbooks or other accounting software. Fundbox reviews the information and, if they are satisfied with your company’s financial health, provides access to cash within a day or so.
Unlike traditional factoring, companies using Fundbox continue to handle their own invoicing and receive the full value of the invoice when they draw cash from Fundbox. The cash drawn must be repaid in either 12 or 24 weeks, along with a fee.
If we took that $10,000 invoice and used Fundbox instead of factoring, you would receive the full $10,000 up front. You would then repay that amount over 12 weeks in payments of $872.17 per week, which includes a fee of $38.83 per week, for a total repayment of $10,466. The fees would be higher for a 24-week repayment.
Other factoring software platforms include:
Whether through traditional factoring or companies like Fundbox, your company’s unpaid invoices are an asset you can leverage for quick cash infusions without many hurdles. If you have questions about factoring or Fundbox and want to discuss whether this is a good option for your small business, please contact us. We welcome the opportunity to assist you.