Best Factoring Companies For Small Business
As a B2B or B2G business, having outstanding invoices is typically a good sign. After all, this shows that you actually have customers and your business is technically bringing in money. Depending on your invoicing policy, however, these outstanding invoices can lead to cash flow issues. For example, if your company policy is to bill with net-60 terms, your customers have up to 60 days to pay. If you have invoiced multiple customers, all of whom wait 60 days to pay, your incoming cash flow could take a big hit in the meantime — not ideal for your business.
If you need extra capital for your business as a result of unpaid invoices, there’s a solution: invoice factoring. This type of small business financing leverages your unpaid invoices and helps you get the money you need in just days. Best of all, traditional qualifying factors, like credit score and annual revenue, may not be a factor for approval.
Sounds intriguing, doesn’t it? But before you move forward with invoice factoring, read on to learn more about exactly what it is, whether your business qualifies, and our recommendations for invoice factors.
|Best for||Recommended Option|
|Borrowers With Low Credit Scores||Fundbox|
|Large B2B Businesses||P2Binvestor|
|Contract Factoring||Riviera Finance|
Table of Contents
What Is Invoice Factoring?
Invoice factoring isn’t the same as a loan. Instead, you sell your qualifying unpaid invoices to a factor for instant cash. Let’s break down exactly how it works.
Normally, you’d send out your invoices, wait for the customer to pay, and receive cash only when the customer pays. In this case, you’re responsible for collecting the payment.
With invoice factoring, you sell your unpaid invoices to a factor. You’ll receive an upfront payment of typically 85% to 95% of the invoice total. Then, the factor collects payment from your customers. Once the customers pay, the factor remits the remaining funds to you — minus any fees charged for the service.
The fees you’ll pay will depend on the factor you select. Most factors have a set daily or weekly factoring fee that is charged until customers pay their invoices. On average, you should expect to pay between 1% and 6% per month.
Let’s look at an example to make invoice factoring easier to understand.
- You sell an invoice worth $20,000 to a factor.
- The factor pays 90% of the invoice value immediately — $18,000 goes directly to you.
- The remaining $2,000 is held in reserve by the factoring company.
- The weekly factoring fee is 0.5% — or $100 per week.
- The customer repays the invoice in three weeks, so the factoring fee adds up to $300.
- This amount is deducted from the cash in reserve — $2,000 — so you receive $1,700.
- In total, you receive $19,700 on the $20,000 invoice.
In this example, $300 was paid for the invoice factoring service. We get it: no business owner likes to just give up money. However, trading such a small amount for instant payment could offer the relief your business needs when you’re in a cash crunch.
Of course, this is also just an example. You may have to pay higher or lower fees based on the factoring company you select, which is why it’s important to shop around. In some cases, you may even find that an alternative financial route makes more sense for your business.
What Type Of Businesses Is Invoice Factoring Right For?
Invoice factoring is best for B2B and B2G businesses that want to resolve cash flow issues due to slow-paying customers.
One of the most important requirements for approval — and with some lenders, the only requirement — is having qualifying invoices. Factoring companies will consider the quality and quantity of your invoices when determining whether to approve your business for invoice factoring. The factoring company will evaluate the value of your invoices and the creditworthiness of your customers. In other words, are your customers likely to pay? If so, you’re a good candidate for invoice factoring.
If you have low annual revenue, a poor credit score, a lack of business credit, or other challenges, you may still be approved for factoring as long as you have qualifying invoices. Be aware, however, that some factoring companies do take into consideration your personal credit score, business profile, and other factors to approve your financing and determine the fees you pay.
Invoice Factoring VS Invoice Financing
Sometimes, the terms “invoice factoring” and “invoice financing” are used interchangeably. However, invoice financing — also known as accounts receivable financing — is slightly different from factoring.
|Invoice Financing||Invoice Factoring|
Uses invoices as collateral for a line of credit
Sell invoices for immediate cash
You are granted a credit facility based on the value of your unpaid invoices, and can draw from your available funds at any time
Factor gives you an advance when the invoice is sent and sends you the rest once the customer pays (minus a factoring fee)
You are responsible for collecting invoice payments
Factor is responsible for collecting invoice payments
With invoice factoring, you receive a lump sum for selling your invoices to an invoice factoring company. With invoice financing, you don’t sell your invoices. Instead, your accounts receivables are used as collateral to secure a flexible line of credit.
That’s not the only difference, though. Because you sell your invoices through invoice factoring, collecting payment from customers becomes the responsibility of the factoring company. With invoice financing, you still own the invoices and collecting from customers remains your responsibility.
Unsure of which option is best for your business? Learn more about invoice factoring and financing to make the best financial decision for your business. Then, read on to check out our top picks for invoice factoring and invoice financing.
Small businesses that need capital fast
BlueVine offers invoice factoring lines up to $5 million with rates starting at 0.25% per week. After filling out a short application, you can be approved for funding in just 24 hours. Once approved, you can upload your invoices or connect your accounting software on BlueVine’s dashboard. You’ll receive up to 90% of funds upfront and receive the remainder — minus fees — after the invoice is paid.
To qualify, you must have a personal credit score of at least 530. You must also own a B2B business that has been in operation for at least 3 months and have at least $100,000 in annual revenue to receive funding through BlueVine.
If you’re looking for a different type of financing for your business, you can apply to receive a line of credit of up to $250,000 with rates starting at just 4.8% through BlueVine.
Startups seeking working capital
One of Breakout Capital’s financial products is FactorAdvantage. Through this program, you can receive up to $500,000 for your unpaid invoices. Repayment terms up to 24 months are available, and fees start at just 1.25% per month. A one-time origination fee of 2.5% is charged by the lender. One thing to note is that Breakout Capital partners with third-party invoice factoring companies to offer this product.
One of the best things about FactorAdvantage is the loan criteria. There are no time in business, personal credit score, or monthly revenue requirements to qualify. Startups are welcome to apply.
Breakout Capital also offers additional financial solutions for your business, including but not limited to equipment leases, Small Business Administration 7(a) loans, and lines of credit.
Business owners with low credit scores
Fundbox Credit is an invoice financing option that provides a business line of credit of up to $100,000. You won’t repay funds when the customer pays back the invoice; instead, you’ll make weekly payments to pay off the borrowed amount. Repayment terms of 12 to 24 months are available with advance fees starting at 4.66%.
To qualify, you must sync your supported accounting software to Fundbox. Your software should reflect activity from at least the last 2 months. Additional requirements include being a business based in the United States with annual revenues of at least $50,000. There are no time in business or personal credit score requirements to qualify.
Lendio is unique from the other lenders in this list because it is not a direct lender. Instead, it is a loan aggregator that connects you with more than 75 of the nation’s top lenders. This is a great option if you want to shop around for the best rates.
Through Lendio’s network of lenders, you can receive accounts receivable financing in amounts up to 80% of your receivables. Terms up to 1 year are available with factor rates starting at 5% for the most qualified borrowers. There are no credit score requirements, and you can receive multiple offers in just minutes with one application.
If accounts receivable financing doesn’t seem like the best choice for your business, you can also apply for other financial products through Lendio, including short-term loans, SBA loans, and equipment financing.
Large B2B businesses
Through P2Binvestor, you can apply for asset-backed lines of credit from $250,000 up to $10 million. These lines of credit come with 1-year revolving terms. There are no specific rates listed by the lender, but rates in the “high teens” should be expected.
P2Bi’s lines of credit are secured using accounts receivables and/or inventory. A personal guarantee is also required. This financial product is best for larger B2B businesses, and requirements include minimum annual revenue of $500,000 and at least 6 months in business. According to P2Bi, the ideal borrower owns a business with at least 10 employees, at least 10% annual revenue growth, and at least $2 million in annual revenue.
Businesses that want to enter into a long-term factoring agreement
Through Riviera Finance, you can receive up to $2 million for your unpaid invoices. The factor will pay up to 95% of your invoice value upfront, putting more of your own money in your pocket sooner. Riviera Finance works with companies of all sizes, and there are no time in business, credit score, or revenue requirements. Rates start at 2%, and a 6-month contract is typically required.
Through this company, invoices for pre-approved debtors are funded within 24 hours of receipt. Even if the debtor hasn’t been pre-approved, Riviera Finance will work to get the invoice funded in the same timeframe.
How To Choose A Factoring Company
Whether you’re choosing between a few of our recommended lenders or you’re comparing options on your own, it’s important to know what to look for when choosing a factoring company. Before signing your agreements, consider the following:
When you need money quickly, it’s easy to lose sight of the big picture and think only in the short term. Fast approvals and quick funding can be alluring, but these conveniences may come at a cost. Shop around to ensure you receive the most affordable factoring fees for your situation.
Even if the factoring fees are very low, also keep an eye out for additional fees, which can drive up the cost of your financing. Check out our side-by-side comparisons to find the most affordable option for your business.
In addition to factoring fees, some factoring companies charge additional fees for their services. These include but are not limited to:
- Origination Fees
- Servicing Fees
- Monthly Minimums
- Renewal Fees
- Money Transfer Fees
- Early Termination Fees
Over time, these fees can really pile up, so it’s important that you understand all costs associated with the product before signing a contract or opening an account.
Spot Factoring VS Contract Factoring
Before you choose your factoring company, consider the volume of invoices you plan to submit for factoring. Will this be a one-time deal to get you over a financial hump, or do you need a more long-term solution to help with incoming cash flow?
If you only need funds to clear a temporary financial hurdle, spot factoring may be the right choice for you. With spot factoring, you get to choose the invoices that are factored and you aren’t locked into a contract. However, this often comes with higher factoring fees.
If you have multiple invoices that you’ll use to secure capital over a longer period of time, consider contract factoring. In this case, you’ll sign a long-term contract — typically 6 months or longer — that will require you to sell all or most of your invoices to the factor. With contract factoring, fees are often lower but you must meet certain volume requirements each month with most factors. There may be additional fees if you don’t meet this volume or if you end your contract early.
Recourse VS Non-Recourse
From time to time, a customer may not pay their invoice. You may have your own policies in place when this happens to your business, but what happens if you’ve sold the invoice to a factor? The process depends on the arrangement of your agreement.
If you have a recourse agreement, the responsibility falls back on you to purchase the unpaid invoice. If you have a non-recourse agreement, the responsibility of handling the unpaid invoice falls on the factoring company. It is important to note, however, that a disputed invoice may still be your responsibility, even under a non-recourse agreement. Learn more about the benefits and drawbacks of non-recourse agreements.
If unpaid invoices are throwing a wrench in your incoming cash flows, invoice factoring can certainly help. However, as with any other financial product, it’s important to fully weigh the benefits and drawbacks, consider short- and long-term costs, and explore other options for getting the capital you need, including business credit cards and unsecured lines of credit.
Consider the long-term effects of financing, then determine if invoice factoring is the right choice for your business.