{"id":2751,"date":"2018-07-26T15:49:12","date_gmt":"2018-07-26T12:49:12","guid":{"rendered":"https:\/\/www.lending-express.com\/blog\/?p=2751"},"modified":"2019-02-06T11:43:13","modified_gmt":"2019-02-06T09:43:13","slug":"what-is-invoice-factoring-how-does-it-work","status":"publish","type":"post","link":"https:\/\/www.become.co\/blog\/what-is-invoice-factoring-how-does-it-work\/","title":{"rendered":"What Is Invoice Factoring &#038; How Does It Work?"},"content":{"rendered":"<h2><span style=\"font-weight: 400;\">Complete Guide to Invoice Factoring<\/span><\/h2>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">Invoice factoring is a common business financing solution that can be a lifesaver for small-medium businesses when faced with cash-flow problems. Invoice factoring is a form of financing that converts any outstanding invoices due (within 90 days) into cash that will be immediately available for your business.<\/span><span style=\"font-weight: 400;\"><br \/>\n<\/span><span style=\"font-weight: 400;\"><br \/>\n<\/span><b>Invoice factoring is ideal for SMBs who:<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Don\u2019t want to provide collateral<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Cannot qualify for large bank loans <\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Have cash flow issues<\/span><\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">Invoice factoring for small businesses is a preferred financing method as credit checks can be bypassed and small businesses don\u2019t need to present a business plan allowing them to get funded much more easily. <\/span><span style=\"font-weight: 400;\"><br \/>\n<\/span><span style=\"font-weight: 400;\"><br \/>\n<\/span><span style=\"font-weight: 400;\">If you aren\u2019t sure if this is the type of loan you are seeking, head over to our <\/span><a href=\"https:\/\/www.become.co\/blog\/guide-comprehensive-guide-to-financing-a-business\/?s=guide\" rel=\"noopener\"><span style=\"font-weight: 400;\">guide to business lending<\/span><\/a><span style=\"font-weight: 400;\"> to see if this is the right option for your business.<\/span><\/p>\n<p>&nbsp;<\/p>\n<p><img decoding=\"async\" class=\"wp-image-2203 size-full aligncenter\" title=\"Invoice Factoring\" src=\"https:\/\/www.become.co\/blog\/wp-content\/uploads\/2018\/04\/evaluation-thin.png\" alt=\"Invoice Factoring\" width=\"149\" height=\"149\" \/><\/p>\n<p>&nbsp;<\/p>\n<h2><span style=\"font-weight: 400;\">What is invoice factoring?<\/span><\/h2>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">Although gaining wide popularity in recent years, invoice factoring can be dated back to the ancient Mesopotamians some 4,000 years ago and was favored by the Romans. Merchants spread across the large global Roman Empire were able to conduct business in faraway places using factoring. Factoring made it possible for merchants to fund expeditions and continue business during the slow seasons &#8211; very similar to how its benefits today. <\/span><\/p>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">So how does invoice factoring work? It may sound like a fancy schmancy concept but it\u2019s not too difficult to get your head around\u2026 in essence, factoring is a form of invoice financing where businesses sell their accounts receivable book to an external finance provider to make your life easier. You can get cash \u2018now\u2019 for all of your invoices due, and wave goodbye to late payments. Your company can then use that cash to cover expenses that need taking care of. <\/span><\/p>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">An external \u2018factor\u2019 will purchase invoices from a business allowing it to receive cash up front rather than waiting around for customers to pay. <\/span><\/p>\n<p>&nbsp;<\/p>\n<h2><span style=\"font-weight: 400;\">How does invoice factoring work?<\/span><\/h2>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">If you\u2019re wondering \u2018what is invoice finance factoring\u2019 you\u2019re not alone. The terms financing and factoring are all too easy to muddle-up. Though similar, they are not the same things and there are some key differences. Here\u2019s an easy break down so you can see how both processes look. <\/span><\/p>\n<p>&nbsp;<\/p>\n<p><b>A step-by-step guide to invoice factoring <\/b><\/p>\n<ol>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Send an invoice copy to your customer that you\u2019re factoring<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Assign invoices to a chosen factor <\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The factor will advance ~80% of the invoice (in cash) to you immediately<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Your customer will then pay (in full) the factor when the invoice is due<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The factor will then forward the remaining ~20% (minus fees) in cash<\/span><\/li>\n<\/ol>\n<p>&nbsp;<\/p>\n<p><b>A step-by-step guide to invoice financing<\/b><\/p>\n<ol>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Create an account with a lender and sync accounting software<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Select all the invoices you want to clear<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The lender will advance 100% of the selected invoices<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">You will then repay the lender over the next 12 or 24 weeks <\/span><\/li>\n<\/ol>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">Be aware that some industries are more used to invoice factoring than others. For example, in shipping\/trucking companies and recruiting agencies it\u2019s common practice to use invoice factoring. If factoring isn\u2019t so common in your industry, it may be better for you to go with invoice financing (which does not require you to assign an invoice when the factor advances it). <\/span><\/p>\n<h3><span style=\"font-weight: 400;\">What are the costs?<\/span><\/h3>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">How much does invoice factoring cost? It\u2019s common practice that you\u2019ll get an advance of around 80% of your invoice and then the remaining 20% after the invoice has been paid minus, of course, the invoice factoring rates which can vary from 1-4%. Some lenders will actually provide 100% of the advance rather than splitting it up and allow you to pay back the fees over the next 3-12 months.<\/span><\/p>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">The fee structure, however, will vary greatly depending on the factoring company you choose to go with<\/span> <span style=\"font-weight: 400;\">and a number of other factors including:<\/span><\/p>\n<p>&nbsp;<\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Volume of monthly receivables <\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Average size of invoices<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Industry<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Length of time it takes customers to pay <\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Creditworthiness of your customers<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Business credit score <\/span><\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">It\u2019s worth mentioning that the creditworthiness of your customers is one of the most important factors. The better behaved your customers (as in, the faster they pay) can mean for better agreement terms. Think about it this way, the factoring company will be taking on the financial risk of any unpaid invoices, so they need to know their risks beforehand. <\/span><\/p>\n<p>&nbsp;<\/p>\n<p><b>When it comes to uncollected debt <\/b><span style=\"font-weight: 400;\">from your customer, each factoring company will handle this scenario differently though the general path would see them taken to court to fight the case.<\/span> <span style=\"font-weight: 400;\">Be sure to read the terms and conditions of each company as it will be outlined there or in your contract. <\/span><\/p>\n<div style=\"overflow-x: auto;\">\n<p>&nbsp;<\/p>\n<h2><span style=\"font-weight: 400;\">Why use invoice factoring?<\/span><\/h2>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">Why? Why use invoice factoring over taking out a regular <\/span><a href=\"https:\/\/www.become.co\/business-loans\/\" rel=\"noopener\"><span style=\"font-weight: 400;\">business loan<\/span><\/a><span style=\"font-weight: 400;\">? The biggest plus to using invoice factoring is that it allows your business to stabilize its cash flow by removing payment delays from the equation. With a regulated stream of funds, you will be able to run and expand your business with more peace of mind. Invoice factoring is not a static loan offering a one-time payout, it\u2019s a continuous agreement between two businesses (you and the factor) whereby both can benefit. \u00a0<\/span><\/p>\n<h3 style=\"text-align: left;\"><span style=\"font-weight: 400;\">What are the pros and cons of invoice factoring?<\/span><\/h3>\n<div style=\"overflow-x: auto;\">\n<table class=\"text-center\" style=\"border-collapse: collapse; border-spacing: 0; border-color: #aabcfe; table-layout: fixed; width: 629px;\">\n<colgroup>\n<col style=\"width: 298px;\" \/>\n<col style=\"width: 331px;\" \/><\/colgroup>\n<tbody>\n<tr>\n<th style=\"font-size: 16px; font-weight: bold; padding: 10px 5px; overflow: hidden; word-break: normal; color: #ffffff; background-color: #113e59; text-align: center; vertical-align: top; border: 1px solid #ffffff;\">Pros<\/th>\n<th style=\"font-size: 16px; font-weight: bold; padding: 10px 5px; overflow: hidden; word-break: normal; color: #ffffff; background-color: #113e59; text-align: center; vertical-align: top; border: 1px solid #ffffff;\">Cons<\/th>\n<\/tr>\n<tr>\n<td style=\"font-size: 16px; padding: 10px 5px; overflow: hidden; word-break: normal; color: #000000; background-color: #ffffff; text-align: center; vertical-align: top; border: 1px solid #ffffff;\"><span style=\"font-weight: bold;\">Immediate cash available <\/span>&#8211; to help solve cash flow issues, allowing you to pay expenses and move your business forward<\/td>\n<td style=\"font-size: 16px; padding: 10px 5px; overflow: hidden; word-break: normal; color: #90b586; background-color: #ffffff; vertical-align: top; border: 1px solid #ffffff;\">\n<p style=\"text-align: center;\"><span style=\"font-weight: bold;\">Costs <\/span><\/p>\n<p style=\"text-align: center;\">(1-4%)<\/p>\n<\/td>\n<\/tr>\n<tr>\n<td style=\"font-size: 16px; padding: 10px 5px; overflow: hidden; word-break: normal; color: #000000; background-color: #e6edf1; text-align: center; vertical-align: top; border: 1px solid #ffffff;\"><span style=\"font-weight: bold;\">Relatively easy to qualify <\/span><br \/>\n<span style=\"text-align: center;\">compared to other loan product<\/span><\/td>\n<td style=\"font-size: 16px; padding: 10px 5px; overflow: hidden; word-break: normal; color: #90b586; background-color: #e6edf1; text-align: center; vertical-align: top; border: 1px solid #ffffff;\"><span style=\"text-algin: center;\"><span style=\"font-weight: bold;\">One dimensional <\/span><br \/>\nit focuses on solving cash flow shortfalls due to slow paying clients, and not much else<\/span><\/td>\n<\/tr>\n<tr>\n<td style=\"font-size: 16px; padding: 10px 5px; overflow: hidden; word-break: normal; color: #000000; background-color: #ffffff; text-align: center; vertical-align: top; border: 1px solid #ffffff;\"><span style=\"font-weight: bold;\">Only uses your invoices as<\/span><br \/>\n<span style=\"text-align: center;\"><span style=\"font-weight: bold;\"> collateral <\/span>there\u2019s no need to give up equity, inventory, real estate etc.<\/span><\/td>\n<td style=\"font-size: 16px; padding: 10px 5px; overflow: hidden; word-break: normal; color: #90b586; background-color: #ffffff; text-align: center; vertical-align: top; border: 1px solid #ffffff;\"><span style=\"font-weight: bold;\">Depends on the creditworthiness <\/span><span style=\"text-align: center;\"><br \/>\n<span style=\"font-weight: bold;\">of your clients\u00a0<\/span>if they often have trouble paying bills, you may be offered a smaller cash advance or pull out altogether<\/span><\/td>\n<\/tr>\n<tr>\n<td style=\"font-size: 16px; padding: 10px 5px; overflow: hidden; word-break: normal; color: #000000; background-color: #e6edf1; text-align: center; vertical-align: top; border: 1px solid #ffffff;\"><span style=\"font-weight: bold;\">The line can increase as you need it<\/span><br \/>\n<span style=\"text-align: center;\">(as long as your invoices increase and the credit quality of your clients remains good)<\/span><\/td>\n<td style=\"font-size: 16px; padding: 10px 5px; overflow: hidden; word-break: normal; color: #90b586; background-color: #e6edf1; text-align: center; vertical-align: top; border: 1px solid #ffffff;\"><span style=\"text-align: center;\"><span style=\"font-weight: bold;\">Factors will contact your clients<\/span><br \/>\n(to inform them that they will manage your invoices as well as if payments are late)<\/span><\/td>\n<\/tr>\n<tr>\n<td style=\"font-size: 16px; padding: 10px 5px; overflow: hidden; word-break: normal; color: #000000; background-color: #d2e4fc; vertical-align: top; border: 1px solid #ffffff;\">\n<p style=\"text-align: center;\"><span style=\"font-weight: bold;\">Allows you to provide payment<\/span><\/p>\n<p style=\"text-align: center;\"><span style=\"font-weight: bold;\"> terms to clients<\/span><\/p>\n<\/td>\n<td style=\"font-size: 16px; padding: 10px 5px; overflow: hidden; word-break: normal; color: #666699; background-color: #d2e4fc; vertical-align: top; border: 1px solid #ffffff;\">\n<p style=\"text-align: center;\"><span style=\"font-weight: bold; color: #90b586;\">Still a chance invoices <\/span><\/p>\n<p style=\"text-align: center;\"><span style=\"font-weight: bold; color: #90b586;\">won\u2019t get paid <\/span><span style=\"color: #90b586;\">finance companies are not\u00a0<\/span><span style=\"color: #90b586; font-family: inherit;\">collection agencies (bad debt should\u00a0<\/span><span style=\"color: #90b586;\"> be assigned to an attorney or\u00a0<\/span><span style=\"color: #90b586; font-family: inherit;\">collections company)<\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p style=\"text-align: center;\">\n<\/div>\n<h2><span style=\"font-weight: 400;\">Who qualifies for invoice factoring?<\/span><\/h2>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">Since invoice factoring is an extremely efficient way of increasing cash flow, businesses of all shapes and sizes including start-ups to large corporations use it as a cash flow tool. Meaning, <\/span><i><span style=\"font-weight: 400;\">any <\/span><\/i><span style=\"font-weight: 400;\">business in <\/span><i><span style=\"font-weight: 400;\">any <\/span><\/i><span style=\"font-weight: 400;\">industry can qualify for invoice factoring. In fact, when it comes to qualifying, it\u2019s much, much easier than a traditional bank loan. <\/span><\/p>\n<p>&nbsp;<\/p>\n<p><b>You can qualify for invoice factoring:<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Even if you have bad credit <\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Not been in business long (at least 6 months)<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">You are making at least 6k (USD) a month<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Already used unsecured loans and lines of credit<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Only if you are using an online accounting software (e.g. <\/span><a href=\"https:\/\/quickbooks.intuit.com\/\" rel=\"noopener\"><span style=\"font-weight: 400;\">QuickBooks<\/span><\/a><span style=\"font-weight: 400;\"> and <\/span><a href=\"https:\/\/www.xero.com\/us\/\" rel=\"noopener\"><span style=\"font-weight: 400;\">Xero<\/span><\/a><span style=\"font-weight: 400;\">)<\/span><\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<h2><span style=\"font-weight: 400;\">How to apply for invoice factoring?<\/span><\/h2>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">For those who can\u2019t qualify for alternative funding and need to better manage their cash flow, invoice factoring for small businesses is perfect, the question remains how do you apply for it? When you apply for invoice factoring via <\/span><a href=\"https:\/\/www.become.co\/\"><span style=\"font-weight: 400;\">Become<\/span><\/a><span style=\"font-weight: 400;\">, you\u2019ll only need to fill out one application which will lead you to be shown relevant offers outlining the factors and lenders that you can qualify for. Rather than applying through many companies to see if you qualify, Become works to cut your work and make the application process much easier. <\/span><\/p>\n<p>&nbsp;<\/p>\n<p><strong>What an application process will look like:<\/strong><\/p>\n<p>&nbsp;<\/p>\n<ol>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Fill out a short application via Become\u2019s <\/span><a href=\"https:\/\/www.become.co\/invoice-factoring\/\"><span style=\"font-weight: 400;\">Invoice factoring<\/span><\/a><span style=\"font-weight: 400;\"> application <\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Select the factor, or funder that you would like to go with<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">You\u2019ll receive an email where you\u2019ll need to connect your accounting software used by your business<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Read over the T&amp;C\u2019s and you\u2019re ready to get started!<\/span><\/li>\n<\/ol>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<h6><b><i>Disclaimer: The information contained in this article is provided for informational purposes only, should not be construed as legal advice on any subject matter and should not be relied upon as such. The author accepts no responsibility for any consequences whatsoever arising from the use of such information.<\/i><\/b><\/h6>\n","protected":false},"excerpt":{"rendered":"<p>Complete Guide to Invoice Factoring &nbsp; Invoice factoring is a common business financing solution that can be a lifesaver for small-medium businesses when faced with cash-flow problems. Invoice factoring is a form of financing that converts any outstanding invoices due (within 90 days) into cash that will be immediately available for your business. Invoice factoring [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":2767,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[13,79,1,12],"tags":[26],"class_list":["post-2751","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-aus-resources","category-business-guides","category-uncategorized","category-us-resources","tag-guide"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.5 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>What Is Invoice Factoring &amp; How Does It Work? - Business Funding Blog<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.become.co\/blog\/what-is-invoice-factoring-how-does-it-work\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"What Is Invoice Factoring &amp; How Does It Work? - Business Funding Blog\" \/>\n<meta property=\"og:description\" content=\"Complete Guide to Invoice Factoring &nbsp; Invoice factoring is a common business financing solution that can be a lifesaver for small-medium businesses when faced with cash-flow problems. Invoice factoring is a form of financing that converts any outstanding invoices due (within 90 days) into cash that will be immediately available for your business. 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