What is Invoice Factoring?
Invoice factoring is a form of small business funding where a business sells its invoices to a factoring company in exchange for up-front funding. When the invoice is paid by the customer, the remaining balance is paid to the business owner minus a fee.
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Invoice factoring allows you to receive the working capital you need to maintain operations and plan for the future, but without taking on the periodic fixed payments associated with a term loan. If slow-paying clients are stalling your cash flow, invoice factoring can help you by liquidating your outstanding accounts receivables to keep your business running.
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Rather than waiting 30 to 120 days for your customers to pay you the money you need to run your business, invoice factoring provides you with funds within 24 to 48 hours.
How does Invoice Factoring work?
After submitting your invoices to the lender for invoice financing, you’ll receive the amount of the invoice minus a percentage as payment. Once the client pays you, you satisfy the agreement with the lender. While it may be helpful to have the lender collect unpaid invoices on your behalf, understand that you will have less control over the collections process and that your clients may become aware of your cash flow shortages.
Step One
Small business owners sell outstanding invoices to a factoring service (the factor) at a discounted rate. The factor advances a lump sum up to 95% of the value of the invoice.
Step Two
The factoring service then proceeds to collect all payments directly from the clients of the small business.
Step Three
The factoring service sends the remaining balance to the business, minus any fees, which is typically an agreed-upon percentage.
Invoice Factoring Advance Details
Qualifying Criteria
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550+ credit score
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6+ months in business
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$10,000+ average monthly bank deposits
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Vary across industries
Required Items
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Signed one page funding application
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3-5 most recent months company bank statements
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Full credit report
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Unpaid Customer Invoices
Advantages & Disadvantages
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Invoice factoring provides a safe, immediate source of cash flow by releasing working capital that is tied up in unpaid invoices.
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Having a lender collect invoices for you can help you save time spent on administration and chasing late payments.
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Factoring provides flexibility as amounts can expand and contract with your sales volume.
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Invoice factoring companies will verify your invoices with clients to ensure that they are accurate. Including a third party can affect customer relationships and also means that you will have to give up some control.
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If your client has a weak payment history or credit score, it may affect your approval.
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Invoice factoring can reduce the scope of additional borrowing and often has higher costs than a longer-term loan.