Best Invoice Factoring Companies

Invoice financing and invoice factoring are processes by which lenders will advance money to small businesses on the basis of their as-yet unpaid invoices. 

There are several advantages to this type of financing over the traditional bank loan. First, many small businesses have an easier time qualifying for it. Additionally, bank loans can take weeks (if not months) to process, which can make them impractical for businesses that are in urgent need of funds to cover operating expenses.

Lastly, while invoice financing options have higher transaction fees and often higher interest rates than bank loans, they are a short-term option where the interest only accrues until the invoice gets paid. Invoice financing is essentially a way for businesses to invest in their operation immediately without having to wait around for customers to pay.

Among the typical uses of the funds are for employee payroll, supplier payments, equipment purchases, or business expansion. However, although invoicing factoring and financing are similar in that they both use unpaid invoices to obtain funding, there are significant differences between them.

Invoice Factoring

With invoice factoring, a business sells their accounts receivable to a third-party – the factoring company.

Obtaining financing using this method is easier than other alternatives because businesses are technically selling an asset, not requesting a loan. Because of this, factoring is accessible to many small businesses as long as the factoring company considers their customers to be creditworthy, that is, likely to pay the outstanding invoice.

In practice, the invoice factoring company will do a financial risk-assessment on the outstanding accounts receivable and determine the amount they are willing to lend.  Once finalized, the customer is notified and the business will receive a cash advance. Depending on the business and its industry, the advance will be worth somewhere between 70% and 90% of the outstanding invoice total.

The advance will need to be repaid within a predetermined length of time. In some cases, this may be 30 days, while in others it may be six months. Regardless of the term of the advance, for every month that the advance goes unpaid, a factor fee is incurred upon the total. Usually, this amounts to an additional 3%.

Because this percentage is charged monthly, and the repayment terms are relatively short, invoice factoring loans generally have very high APRs. However, if you have a plan in place to pay early, and are sure the loan will generate revenue, it can be an ideal option for certain borrowers. 

Recourse Versus Non-Recourse Factoring 

The above-mentioned processes typically fall under the category of Recourse Factoring.

In this type of factoring, the company selling the invoices is responsible if the client defaults on their account. This makes Recourse Factoring riskier for the seller than for the factoring company. Non-Recourse Factoring is less common. Under this type of transaction, the financial institution accepts the liability for any unpaid invoices.

Because it’s a much riskier proposition for the lender, this type of factoring is usually harder to qualify for and involves much higher transaction fees. Additionally, it doesn’t necessarily protect the selling company from liability. Since these agreements often stipulate that the factoring company will only assume the responsibility for the invoice if the client has declared bankruptcy, small businesses could still be on the hook if the client simply doesn’t pay or shuts the business down.

INVOICE FINANCING

Invoice financing involves a more traditional type of lending. In this type of financial agreement, a small business can apply for a loan using their outstanding invoices as collateral. An accounts receivable financing company then lends the company a portion of the invoice amount, typically between 70% and 90% of its value.

The lender will hold the 10% to 30% in reserve after collecting an initial processing fee of around three percent. The amount in reserve will then be subject to fees, usually about one and three percent calculated weekly.  

When the customer pays the outstanding invoice, the lender will give the borrower the remaining amount they had in reserve, minus the transaction fees. This means that the cost of invoice financing depends largely on the speed with which customers pay their outstanding balance.

Invoice financing is quick – businesses can often receive funds within one day of approval. Once the client pays the invoice, the financing company will give the company the rest of the money minus a transaction fee, usually three percent.

Before funding, lenders will verify that the invoices are valid to make sure that the invoice is due, and that there aren’t obstacles to payment, for example disputes or chargebacks. They will also check the client’s history of paying bills on time. Typically, the newer the invoice, the more valuable it is.

Additionally, invoices for larger companies with a longer history will be more valuable than those collecting from smaller, newer companies. Essentially, the less of a risk the invoice presents to the financing company, the more they will pay for it.

Another type of financing method is the invoice discounting process. While in traditional invoice financing the responsibility for collecting on the invoice is transferred to the lender, in invoice discounting, the borrower collects the payments directly.

Choosing An Invoice Factoring Company

Regardless of what type of invoice financing you pursue, there are certain steps you can take and questions you can ask in order to make sure you’re choosing the right company.

What are the terms and fee structure?

The lender or factoring company should be able to explain their terms in clear language and be upfront about their transaction fees and costs. The best companies are flexible and can provide different payment terms and conditions.

How do you collect from customers?

Lenders should have effective collection practices to be able to pursue payment for the outstanding invoices. Collection efforts should start in a maximum of 40 days after delivery of the invoice. Typically, after 90 days, the factoring company may send the invoice back, but many companies are able to provide options to cover the cost.   

What are their requirements?

Do I need to factor all my receivables? Some factoring companies will require the borrowing business to maintain a particular sales volume while others require that you factor all receivables. Make sure you’re aware of the company’s requirements before you commit.

What is their approval process like and what documents do they need?

While factoring and financing companies are typically much more lenient than a bank during their approval process, you will still need to meet certain requirements. Nonetheless, even though they will look at your credit score, lenders will be concerned the most with your client’s creditworthiness, that is, how likely they are to pay the bill in a timely fashion. To this end, lenders will probably ask for evidence of your client’s payment history and your business’ financials. The documentation required will vary from lender to lender, however, so it’s important to be clear on what they need from your business.  

Do they offer both recourse and non-recourse factoring?

If your company has a strong credit history and plenty of stable, creditworthy clients, you might qualify for non-recourse factoring, which can limit your liability if the client files for bankruptcy without paying the invoice.

How long have they been in business and do they have experience with your industry?

Because of the growing popularity of factoring and invoice financing, factoring companies have multiplied exponentially. While the recency of newly established firms is not necessarily a disqualifying quality, experience – especially experience in your industry – is often a good sign.  

Below we've compiled a list of our partners that we feel offer the best invoice factoring services.

You may also view our list of top lender companies that offer regular small business loans.

Top 3 Best Invoice Factoring

#1   Our Partner FundBox is a company that specializes in invoice factoring. We recommend them mainly because of their more flexible approach, with a choice between 12 and 24-week terms. Instead of flat advance maximums and interest fees, each account is customized based on the business’ credit limit and judged sustainability.

As time goes on, these factors are periodically reviewed in order to assess policy changes.

 Read Full Review >

#2   Our Partner Fundera is an ideal choice if borrowers are looking for a short term. The company offers its invoice financing services to small businesses that have been in operation for more than three months, and generate over $50,000 in revenue. If granted invoice factoring, the maximum advance amount will be between 50 and 90% of the total amount.

For every month that the advance goes unpaid, Fundera will add a 3% factor fee. This will continue throughout the term, which is often set for 12 weeks.

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#3   Our Partner FastPay’s FastLane program provides invoice factoring to small business applicants that are not sole proprietorships. FastPay mandates that, for the first transaction, a company’s invoice advance must total between $5,000 and $100,000. For all other exchanges, the minimum is removed, while the maximum may be extended after the first four months. Whatever the amount, a 3% interest fee is attached to the total every 30 days. Small businesses may repay the advance within 30 and 120 days.

 Read Full Review >

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