Invoice factoring is also referred to as “invoice financing,” “accounts receivable financing” or “receivable financing”.
With invoice factoring, a business essentially sells its accounts receivables to a factoring company in order to gain quicker access to those funds. Instead of waiting days or weeks for the invoice to get paid, the business gets an advance on those funds faster, which means having the cash for urgent business needs. For example, a small business owner can use the funds for day-to-day expenses, to cover payroll, purchase supplies, or repair a piece of equipment. These are funds the business has already earned but remain tied up in the invoice process. Invoice factoring allows a business to turn unpaid invoices into working capital.
Funds from invoice factoring could even make it possible for a company to take on an unexpected business opportunity. Many small business owners find themselves in the following dilemma: a new, potential client would like to do business with them, but they need to say no, because they are still waiting for existing customers to pay their invoices and they simply do not have the funds to accept a new order. In this case, invoice factoring could be the solution.
How invoice factoring works
There are usually three parties involved in an invoice financing transaction:
- The business that issued the invoice
- Their customer, or account debtor, who owes payment on an invoice
- The financing company, also known as the “factor,” that would offer the advance on the unpaid invoice
Here is a typical scenario.
After a company delivers the product or service to their customer, they issue an invoice. The company then “sells” the invoice to the factor. In return, the business receives an advance, typically between 70% to 95% of the value of the invoice.
After the debtor pays the outstanding invoice, the business receives a “rebate” for the remainder of the funds, minus a fee that is based on the term and value of the invoice. In the end, all three parties benefit: the customer gets cash upfront, their customer gets favorable payment terms, and the financier collects a fee.
When factoring makes sense
If you’re looking for faster access to capital, factoring is definitely worth considering. The application process is typically simple and straightforward. And the approval rates are much higher compared with a bank. The application process typically does not include some of the major hurdles a small business encounters when applying for a bank loan. In fact, many small businesses typically qualify even if they have been declined by banks.
Most important of all, you gain access to funding faster allowing you quickly address pressing or long-term business needs.
When factoring may not be your best option
Factoring may not be for your small business if cost is one of your major concerns. Applying for a bank line of credit may be more tedious and take a longer time, but a bank line of credit is typically less expensive than factoring.
With factoring, the factor may also need to notify your customers about the financing arrangement—that their payments will need to be processed through the factor. This could make some small business owners and their customers uncomfortable. Some small businesses worry about how this arrangement could affect their relationships with their own customers.
In traditional factoring, the factors even effectively take over the business’s invoice financing system. Fortunately, that is not the case with new online factoring services, which offer more flexible options.
Invoice factoring, a changing industry
Factoring has been around for centuries and it is an established industry in the United States, where it caters to specific industries. It is widely used in different industries and markets, such as public relations, professional services, marketing, technology, staffing, wholesale trade and manufacturing companies. However, many small businesses are unfamiliar with factoring; and the industry itself has been undergoing significant changes, especially with the emergence of online, technology-enabled invoice factoring companies.
New Options for Online Invoice Factoring
The emergence of financial technology companies (FinTech for short) innovating on traditional Invoice Factoring is expanding the range of options available to small and medium sized business owners (SMBs). By applying the latest technology, these players can provide a faster, more flexible solution for the financing needs of SMBs. This opens up new opportunities to take advantage of Invoice Factoring in ways that traditional invoice Factoring couldn’t serve.
BlueVine is one of these emerging FinTech companies rapidly transforming Invoice Factoring. By focusing on small and medium business needs, BlueVine delivers a unique offering for SMB business owners, with notable differences from the traditional factoring providers.
BlueVine has made its name by providing fast, flexible, online Invoice Factoring to businesses with $250,000 - $30M in annual revenue. The application process takes minutes and is done online, and approvals are typically provided within 24-48 hours. Once approved, you stay in control of what invoices you factor, and when you factor. They provide factoring lines up to $5M in funding, and the solution is accessible from your desktop, mobile phone and tablet. Rates are as low as 0.25% per week, with advances up to 90% of your invoice value.
While traditional factoring providers focus on specialized industries, BlueVine serves a broader range of businesses, with a heavy focus on Professional Services, IT, Media, and Manufacturing.
BlueVine’s online Invoice Factoring solution is tailor-made for businesses that do not want to factor their entire accounts receivable, but instead want to pick and choose what invoices they factor on-demand. By retaining this flexibility to factor on demand, businesses using BlueVine can utilize the solution when cashflow tightens.
If you’re interested in having an on-demand factoring solution in your toolkit to use when you need it, go to BlueVine to learn more.
Visit www.bluevine.com/bonadio for more information.
Peter VanPutte is the Managing Director of TBG Commercial Capital Partners, LLC based out of our Rochester, NY office.