Invoice Factoring Guide for Small Businesses

 

Part of being a small or medium business owner (SMB) is keeping tabs on your incoming revenue. If you get paid upfront, this is easy to do. But many businesses invoice their clients, which means waiting until the customer decides to pay their bill.

However, if your business operates through invoicing, you still have overhead and expenses to cover. Your bills won’t wait to get paid just because you haven’t yet, so you need cash now.

Instead of accruing late fees and dealing with a negative hit to your credit score, you can look at other financing options. Invoice factoring services and alternative methods to high-interest credit cards give you the money you earned before your clients pay.

It sounds too good to be true, right?

In some cases, it can be. That’s why you have to know what each financing option includes and watch for the pros and cons. This guide, created specifically for small and medium or small, medium, and growing businesses, will help you decide whether invoice factoring is right for you.

1. Start With Your Invoice System, First

Before you jump into an alternative method of collecting payments, first make sure you’ve streamlined your own system.

A lot of businesses (and individuals) have their own method of paying their invoices. When you make your terms clear and the bill easy to pay, yours may get pushed to the top.

Using another invoicing option will get you paid faster. However, when you send a bill to your client, there are some basic rules to follow to optimize your invoices.

To maximize your system’s impact, first, you need to decide if paper or electronic invoicing is right for your company. We’re on a digital trend in the world. Paper is quickly becoming obsolete as the benefits of electronic communication increase.

Electronic invoicing is gaining in popularity with businesses for multiple reasons:

• Consumers often prefer the ease of digital invoices and online payments.

• This significantly reduces the cost to prepare and send each bill, and less staffing is necessary.

• The turnover between submission and payment is often much faster.

• In a world that’s increasingly environmentally conscious, there is a smaller carbon footprint with digital invoicing.

Digital invoicing increases the profitability and productivity of a business. Whether you choose to go digital or stick with paper, there are ways to streamline your system.

Streamlining Your Invoice System

If you’re doing all the legwork to put your invoice together, you’re working too hard. There are hundreds of automated invoicing systems on the market for small to medium businesses.

Make It Clear

Regardless of how you put together your invoice, make sure it’s clearly written and all the essential information is easy to find. Your name and contact information, the client’s itemized order or product, and the total due are the first three major pieces to include.

Add Terms

To make it easier for the client to pay, you should also add your 30-60-90 day term policy, including late payments. If your business establishes long-term contracts before working with anyone, make late payment terms clear in the paperwork.

Having a clear invoice with details and terms will also help if you do decide to work with an invoice acceleration platform or factor or invoice financing. They will all require copies of this information.

List Payment Options

Boldly state the types of payments you accept and how to pay the invoice. Online portals are one of the best options to have because many clients prefer these over mail-in payments.

If you’ve gone through every step and still have a problem getting paid promptly, it could be time to take other measures.

Invoice factoring is one of the first alternatives many small business owners then turn to.

2. What is Invoice Factoring?

For most business owners, the most attractive thing about invoice or accounts receivable factoring is that it’s not a loan. There aren’t any major hurdles to jump or monthly bills to pay.

Invoice factoring, also known as invoice discounting, in short, is when you sell your invoices to a company that works in this line of business. They buy your current and outstanding invoices for a little under the value of the invoice. They then own the invoices and get paid by the client when they pay their invoice.

This sounds too good to be true, right?

That an invoice factoring company pays you the discount rate and then gets stuck with the clients that aren’t going to pay! Well, like anything that’s “too good to be true,” there are advantages and disadvantages.

The Straight Truth About Invoice Factoring

There are many benefits to how invoice factoring works that make it a tempting system for invoicing businesses. The clear main advantage is the fact that when you have overhead to cover, this financial solution gives you working capital in hand fast.

Another positive benefit of small business invoice factoring is that it’s not a loan.

You are already owed the money. The invoicing company pays you ahead for funds you’re due to collect. This makes it easier to get “approved,” and there is no collateral required since the invoice is collateral itself.

Yet, there are some disadvantages to this system.

There is a fee associated with each invoice, usually one to five percent of the total charge. This can get pricey. It’s up to each individual business to decide if the advantage of getting paid faster is worth the extra cost. Using a company with a flat service fee upfront, based on the original terms of the invoice, is a good deal, especially if it keeps you from waiting for your customer to pay.

The fees are complicated, too. The company you work with may charge a daily fee for every day the invoice is outstanding, for instance. You could get locked into complicated contracts, and there may not be a lot of flexibility to get out of them.

And that “too good to be true” concern you had about the invoices that don’t get paid?

Good catch. Many invoice factoring companies will hold you liable for any unpaid invoices. You’ll either have to pay them outright or trade another invoice for the same amount to take care of it.

While an invoice factoring agreement is a good backup plan to have in case of emergencies, you shouldn’t use it as a way to keep up your everyday operations.

Unless your business is content with the high factoring fee, save this financial solution for when you need help fast.

Related: Our Guide to Spot Factoring (Also Known as Single-Invoice Factoring)

3. Invoice Financing Options

If invoice factoring doesn’t sound appealing to you, invoice financing might.

Invoice financing is a type of loan, but it’s secured with your outstanding invoices. If you need a cash advance right away, an invoice financing company will pay you the total invoice amount. You then pay them that amount back along with a percentage of the invoice, plus additional fees if applicable.

Because it’s secured with the invoice, it’s easier to obtain this type of funding than a traditional loan. You don’t need to undergo a credit check. The lenders usually focus on the credit scores and payment histories of the clients you’re invoicing.

Unlike invoice factoring, with invoice financing, you still have to collect the money from your customers yourself. When they pay the bill, you pay the lender what you owe them.

There are some disadvantages to invoice financing. The percentage of the invoice you pay in fees can add up to hefty payments. Also, if you don’t get paid on an invoice that you used as collateral, you may still be responsible for the amount given to you by the lender and fees.

4. Accelerated Invoice Payment Solutions

Another alternative to loans and invoice factoring is a new type of financing called the accelerated invoice payment solution. This financing method serves as a middle ground for small and medium businesses that want to get paid immediately on their invoices. With an accelerated payment solution, these businesses can still get paid quickly and offer customers long-payment terms that attract clients.

With an accelerated invoice payment solution, you choose which invoices you want to get paid on early.

How It Works:

You submit the invoices you choose to the company, and they pay you the face value invoice amount minus a service fee. The remaining balance is yours to use as you please.

The lender then contacts the client directly for payment. It’s similar to invoice factoring, but you have more control. For example, if you submit a $100,000 invoice, you’ll get $97,000 immediately, with no concerns about other fees or repaying a loan.

5. Small Business Lines of Credit

Some lenders offer a line of credit (LOC) to business owners. It works like a credit card, with a few distinct differences.

First, there are two types of business lines of credit: secured and unsecured.

A secured line of credit is easier to get because there is collateral backing up the lender’s investment. This collateral could be in the form of a short-term asset like accounts receivables or your inventory.

Unsecured lines don’t require collateral but you will likely have to sign a general lien to guarantee payment. As with any lending solution, unsecured financing will typically have a higher interest rate attached to it.

A LOC is often confused with a business loan. The two are very different. With a term bank loan, your business receives a certain amount of money in one lump sum. You then pay that money back in a predetermined schedule until it is covered in full.

On the other hand, a line of credit allows you access to a given amount of money for a certain time. You pull it out of your bank account as needed and pay it back. Interest accrues only on the amount you’ve used. If you pay that amount back, you can borrow it again.

For instance, if your business is approved for a LOC of $100,000, you may need to pull out $10,000 one month to cover payroll. Interest will accrue on that $10,000 until you’ve paid it back. Once you do, you have the full $100,000 to pull from again for the term of the line of credit.

Annual fees are standard in LOCs, as well as transaction fees. Many lenders allow you to treat your line of credit funds like a bank account. You can write a check or use a credit card tied to the funds to access your money.

In both secured and unsecured lines of credit, you may have to deal with credit checks, proof of financial documentation, and other hurdles. A traditional bank loan can also take weeks or months to receive approval.

6. NowAccount

If your goal is to accelerate your revenue so you can increase your cash flow, a NowAccount may be your solution.

Businesses who sell to other businesses and governments use Now to get paid immediately without changing your customers’ payment terms. It’s an invoice acceleration business financing solution that solves your cash flow problem easily.

Now gives you the advantages of an invoice factoring service with the freedom of flexibility and control. This makes it the preferred financial solution for small and medium businesses who want working capital without having to take on debt.

The Benefits of a NowAccount Include:

• Lower pricing (a 3-5% flat fee)

• Flexibility to choose which customers to use on your NowAccount

• Quick and easy setup

• No loan or hefty payment terms

• Less documentation than a small business loan

• No personal guarantee required

One of the most attractive features of the invoice acceleration solution through NowAccount is that it’s non-recourse, meaning when Now accelerates an invoice, they’ve verified the creditworthiness of your customer.

At that time, Now takes the chance that the invoice won’t get paid. Now’s invoice payment solution is non-recourse working capital. It keeps you from having to cover the loss because they took on the credit risk.

The entire process is straightforward and simple. NowAccount can even integrate with your business’s QuickBooks Online. This gives you the option of uploading your invoices and customer information with the touch of a few buttons.

When your business needs immediate cash, but you don’t want the headache of invoice factoring, invoice acceleration systems are the way to go.

With their no fuss, no personal guarantee, and low-rate solutions, NowAccount may be the financial alternative you’ve been looking for.

Read: Frequently Asked Questions (FAQ) about Now, factoring costs, the factoring process, and how to set up your NowAccount.

Conclusion

Your company isn’t a one-size-fits-all business — your finances don’t need a one-size-fits-all solution.

From invoice factoring to acceleration systems, when you need some extra money quickly, you have options. Weigh the pros and cons of each one, and then choose the financial solution that will help you get back on track the easiest way possible!

Set up your NowAccount to see if you qualify for accelerated invoice payments.