If you own a small business or have ever paid for a service, then you are familiar with what an invoice is. In all likelihood, as a small business owner you spend much of your day sending and paying invoices, and probably nagging some of your clients for payment. Wouldn’t it be nice if you never had to hound clients to pay their invoices again and could cash-in your accounts receivable right away? Invoice factoring and invoice financing, although different, both make receiving immediate funds from your unpaid invoices possible.
In the case of invoice factoring, a finance company will purchase your unpaid invoice from you for a discount. Let’s say you’ve been calling a client now for over a month to pay you for the shipment of widgets he ordered. You’ve sent him an invoice multiple times, and payment is now overdue and you are wondering if you’ll ever get paid. Perhaps your largest business customer negotiated net 90 terms with you, so now you wait three months to get paid every time that company makes a purchase. Instead of having to wait for payment in either of the above scenarios, you could sell your invoice to a factor company for 65% to 85% of its value. The factor company then owns your invoice and takes the liability for collecting from your client directly. The fee the factor company makes is the difference between what it paid you for your invoice and what it collects from the client directly; if the factor company can’t collect it doesn’t get paid. Factor companies usually want you to enter into long-term agreements with them which obligate you to sell your invoices to only them. The agreement can also give them influence over your client choices and require you to sell them a certain amount of invoices every year.
- Your invoice gets paid swiftly
- You don’t have to be a bill collector
- You can free up capital tied to stale receivables
- The factor company collects directly from your client and may not manage the relationship the same way you would
- You only get a portion of your invoice value
- You may be required to sign a long-term agreement with the factor company, limiting future financing options
Similar to invoice factoring, invoice financing enables you to monetize your invoices immediately; there is no waiting to get paid. When you finance an invoice you are not selling it to another company, you are borrowing against the value of your invoice at a specific leverage point and cost. Fundbox will finance an invoice at 100% of its value, the fee is only 0.4% to 0.9% per week over a 12 or 24 week period, and you can pay off your financing at any time without penalty. Let’s say you are waiting on a $1,000 payment from a customer and you decide to finance your invoice through Fundbox. Simply register with Fundbox (it takes about 3 minutes) and link your accounting software. Fundbox will quickly evaluate your business and if you are approved, you’ll be able to assign your invoice for payment right away and receive the full $1,000. You will continue to manage collection of the invoice directly, so there is no concern about someone else handling your client. If your client decides to pay you within a week, using Fundbox only cost $4 and you received 99.6% of your invoice value instead of giving up 15% to 35% to a factor company.
- You get 100% of your invoice value right way
- No paperwork for approval and no contracts
- Low fees starting at only $4 per $1,000 financed
- You get to manage your client relationship the way you want
- You will still have to continue collections on the invoice
- If your client never pays the invoice you still have to pay back the financing
Invoice factoring and invoice financing are both great ways to monetize unpaid invoices to quickly free up capital. Although invoice factoring eliminates the headache of having to collect on your invoices, invoice financing is much more affordable and better for your client relationships. With low finance fees starting at only 0.4%, leverage up to 100% of your invoice value, and no paperwork to fill out or contracts to sign; invoice financing wins out as the preferred option to convert your invoices to cash.
Interested in learning more about invoice financing? Contact our recommended invoice financing lender Fundbox.