Invoice Factoring: What Is It And How Does It Work?

October 26, 2016 / Reading: 4 minutes

Cash flow is more than just generating a profit for your business at the end of the day. Without a steady and reliable cash flow, everyday business decisions turn into major sacrifices and cutbacks, affecting the way you or your staff perform.

If you can’t make ends meet, you begin to doubt the business model, even if it is technically working, it’s just that the debt has your operations in a vice and is preventing you from seeing success.

For most small businesses, all they need is a little help with jump-starting their business’ cash flow. Unfortunately, many small business loans are out of reach in this touch economy, but there is another way. Invoice factoring can take your unpaid invoices and turn them into an instant cash injection.

Is Invoice Factoring Right For You?

Unlike a small business loan, invoice factoring does not operate on interest rates and credit ratings. When a company factors your accounts that are outstanding, it is essentially hedging a bet on being able to collect those monies and offering you a portion of what it’s worth for money right now.

Invoice factoring can take your unpaid invoices and turn them into an instant cash injection.

This process is typically much faster and with a higher success rate than any type of loan. You are also not limited to what the banks will arbitrarily set for how much they are able to offer you.

So with that in mind, let’s take a look at two of the most popular invoice factoring companies are BlueVine and Fundbox so yoy can decide as to which option is more suitable for you and your business needs:

Loan amountUp to $100,000Up to $500,000
Estimated APR13 – 68%16 – 62%
Time to Approval30 mn1 day
Time to Funding1 day1 day
Repayment term3 months6 months
Prepayment penaltyNONENONE

As you can see, their invoice financing services are fairly similar in scope. The major difference lies in the amount you can borrow (BlueVine offers up to $500,000 vs $100,00 for Fundbox). However, on the flipside, Fundbox allows you to receive 100% of the amount all at once, while BlueVine fronts you 85% right off the bat.

Do You Qualify For Invoice Factoring?

Your accounts receivable have to have legitimate business or government invoices that will pass credit-worthy checks. These accounts must be yours and yours only, in that you can’t have underlying deals made with clients that would extend payments or be fulfilled through another party. Lastly, your business must not have a history of bankruptcy or rulings against you from the IRS. Your record must be clean if you do not have a good FICO score.

Plan Ahead Before Factoring

While invoice factoring is ideal for businesses that need money fast to reset their cash flow problems, it should not be something that is done without preparation. You must be a B2B or B2G, even though this should go without saying. Securing a deal usually takes a few months to go through all the credit checks and background checks required. Invoice factoring companies aren’t just running names through databases, they have to do their own research to make sure there are no strings attached and that they are getting their money’s worth.

Invoice factoring should be your first option, not your last option because even if you do have a high FICO rating, if you have any third party disputes or anything questionable on you, like a lien, chances are good that you will eventually get denied. The trade-off for having a squeaky clean background is that when the deal is done, it’s done. You won’t have to live under the added pressure of repaying a loan, plus interest rates, and factoring it all back into your cash flow, which is what we are trying to free up.