Invoice Factoring for Small Businesses | Invoice Financing for Small Business 

Get invoices paid in days for convenient capital. Get back to growing and managing your small business.

WHAT'S IN THIS GUIDE

1. What is Small Business Factoring?
2. What Is Invoice Financing for Small Businesses?
3. How Do Invoice Factoring and Invoice Financing Help Small Businesses?
4. How Does Small Business Factoring Work?
5. The Pros and Cons of Small Business Invoice Factoring
6. The Pros and Cons of Invoice Financing for Small Business
7. Why Do Small Businesses Use Invoice Factoring or Financing?
8. Invoice Financing or Invoice Factoring: Which Is Best for Your Business?
9. What to Look for in a Small Business Factoring Company
10. Is Invoice Factoring Right for my Small Business?
11. Am I a good candidate for invoice factoring?
12. Can Small Businesses Do Invoice Factoring with Bad Credit?
13. Our Approach to Working with Different Industries
Small Business Invoice Factoring FAQs

If your small business has to wait longer for invoices to be paid, you’re not alone. Most of the studies around invoicing have found that most companies pay late. In fact, according to the “Working Capital Playbook,” 93% of businesses¹ experience late payments! FundThrough client data shows that the average time small businesses like yours have to wait before getting paid is 40 days. But it can feel like much longer when you need working capital to cover off everyday expenses like payroll, purchasing supplies, and seasonal dips in cash flow. An unforeseen emergency could leave your business on life support without an adequate source of cash. Let’s not forget about the lost revenue your business misses out on when it doesn’t have the upfront cash to staff up and scale up for new projects.

We know the kind of pressure and uncertainty these problems can cause, because at FundThrough, we’re entrepreneurs, too. It’s frustrating and stressful to be stuck waiting on much-needed cash for work you’ve already done, while trying to collect outstanding accounts receivable. Unfortunately, many SMBs are beholden to the extended payment terms that much larger companies set. It’s not unheard of for these companies to set net terms of 30, 60, or even 90 days, leading to a variety of problems for small businesses:

  • Making payroll. Your financial obligations don’t stop just because you’re waiting on payment from customers. No matter what you’re owed, you’ve still got to pay your employees come payday. We’ve seen many business owners and CEOs stressed out about paying their hard-working employees on time.

  • Missing out on growth opportunities. When a big project comes along, you need funding to take it on. Staffing up, buying supplies, and purchasing equipment are key to growing your business — and isn’t possible without a flexible funding boost. It would be a shame to miss out on a chance to grow your business simply because you don’t have cash on hand.

  • Banks often won’t work with small businesses. If you’re new or don’t have a lot of time in business, you don’t have a financial track record or credit history. Traditional banks view your business as a risk, no matter how much annual revenue is on your books. Even if you’re an established business, it can still take months to apply for a bank loan or business line of credit. Just getting a line of credit limit raised is a lengthy and time-consuming application process. You might not have that kind of time if you’re dealing with one of the above situations.

  • Purchasing supplies. It can be challenging to fulfil orders or take advantage of bulk purchase discounts when you don’t have enough funding. The problem is only exacerbated when you’re stuck waiting on late or overdue payment.

  • Increased admin load. Not only is chasing down late payments a headache, it takes valuable time away from your day. Instead of working on your business and growing your company, you’re stuck making follow-up calls and sending out notices asking for payment (professionally, of course).

 

Small business factoring is an innovative solution to all of these issues. Getting your invoices paid in days rather than waiting on lengthy payment terms provides quick, flexible funding without debt or dilution. With FundThrough, it’s also quick and easy thanks to our online platform and integration with popular accounting software like QuickBooks and OpenInvoice. Continue reading to learn more about small business factoring and whether factoring invoices is right for you.

What is Small Business Factoring?

Small business invoice factoring is a type of accounts receivable financing in which you sell your unpaid invoices to a factoring company for a fee. In return, the factoring company gives you a cash advance within a few business days and waits on your customer to pay the outstanding invoice according to the original payment terms. You get put your funding to work and get back to business.

What Is Invoice Financing for Small Businesses?

Invoice financing is a type of business financing where a small business sells its outstanding invoices or accounts receivable to a third-party financing company, also known as a factor, at a discount. In return, the factor provides you with an advance of the full amount of the outstanding invoice. You repay the factoring company for the advance (plus their fee) over a period of time, usually with weekly or monthly payments. You continue to work with your client on collecting payment. This allows you to receive an immediate cash flow injection, rather than waiting for slow-paying customers to pay their outstanding invoices.

How Do Invoice Factoring and Invoice Financing Help Small Businesses?

The short answer: Invoice factoring and invoice financing help solve the cash crunch that small businesses often face.

The more detailed answer is that these funding methods smooth out any cash flow gaps your business might experience due to a number of issues — the biggest one being late payments or lengthy net payment terms.

Invoice factoring and financing also help your small business grow by giving you a flexible funding boost when you need it. This is especially important when it comes to bidding on new business or taking on a growth opportunity. You get peace of mind that you’ll be able to meet the demands of larger projects.

In addition, small business factoring in particular helps you grow your business without taking on any debt, or giving away equity in your business. You’re simply getting paid for work you’ve already done that’s tied up in accounts receivable. Small business factoring is not a loan, and it’s not another business purchasing a stake in your company, it’s just an advance on unpaid invoices.

Small business invoice financing helps in much the same ways that invoice factoring does. However, in our experience with our clients, invoice factoring can provide added value to businesses by freeing up admin time and cost from not having to manage accounts receivable. Additionally, because invoice factoring is not a loan – unlike invoice financing – it doesn’t show up on your balance sheet as a liability.

How Does Small Business Factoring Work?

The invoice factoring application process usually involves four elements, including:

  • Your company

  • Your business clients or customers

  • Unpaid invoices issued to your clients or customers (also known as accounts receivables)

  • The sale of those invoices to an invoice factoring company (like FundThrough)

Here’s a breakdown of the steps involved when you factor an invoice:

Step 1: See if you’re qualified and create an account with an invoice factoring company. For validation purposes, you will be required to submit several business documents, which might include:

  • Business formation/legal proof of business documents

  • Government-issued photo ID

  • Void check for your business bank account


Step 2: Submit an invoice for funding. You can submit your invoices manually or by connecting to an integrated accounting software such as QuickBooks. With FundThrough, there’s no monthly minimum funding obligation or maximum amount of invoices you can fund.

Step 3: A factoring company does due diligence. This is when the factoring company will confirm the eligibility of your business, your customer, and the submitted invoice.

Step 4: Your customer signs an NOA. When your customer signs a Notice of Assignment, they acknowledge that the factoring company now owns the invoice, and they must redirect payment. While it might concern you with your customer being involved, many large companies are used to this process.

Step 5: Funds are deposited to your account. If your invoice is approved for funding, you’ll receive a cash deposit to your business bank account, less a fee (otherwise known as the invoice factoring cost). You can enjoy peace of mind knowing you have the necessary cash to grow your business and cover any expenses.

Step 6: Your customer pays the factoring company. When the invoice is due, your customer pays the outstanding invoice to the factoring company, and the funding process is complete.

How Does Invoice Financing Work?

Here’s how the invoice financing process typically works:

1. After getting approved with a lender, you’re given a credit limit.

2. You submit outstanding invoices to get financed.

3. The financing company sends you the full dollar amount of the invoice.

4. You repay the advance in agreed-upon instalments with an additional fee on an agreed-upon schedule until the advance is repaid. Sometimes the repayments can start immediately after you’ve received the capital, so ask about when repayments start and ensure you’re prepared accordingly. It’s like an invoice loan for small business.

The Pros and Cons of Small Business Invoice Factoring

Pros of Small Business Factoring

There are many benefits when it comes to small business factoring, including:

  • No bank hassles. Bank business loans, traditional loans, and lines of credit are the traditional go-to solution for filling the cash flow gaps that arise from the unpredictability associated with B2B payments. However, banks usually have cumbersome paperwork requirements, won’t work with new businesses, and the funding period can be anywhere between several days to a few months. FundThrough typically reviews applications and provides funding in a few business days. Your customer’s credit is important; not yours.

  • Quick funding. FundThrough can fund invoices in a matter of just a few business days, saving you months of waiting to get paid or waiting on the bank to make a decision. You can get the funding your business needs quickly, then get back to work.

  • Convenient capital. FundThrough uses technology to help streamline and automate the funding process. This makes it quick and easy to get funding from anywhere you have an internet connection.

  • Easy process. With an online factoring company like FundThrough, you don’t have to worry about filling out time-consuming paperwork. Our online system features AI and automation to make things easy. Plus, QuickBooks integration makes it easy for you to get funded in a few clicks, so you can get back to business.

  • No debt or dilution. As a small business owner or CEO, minimizing debt repayments keeps more of your cash available. And non-dilutive funding let’s you stay in control of your company. Invoice factoring is not a loan and it’s not equity financing, so you don’t have to worry about paybacks or how investors will affect your business as time goes on.

  • No long-term commitment once the invoice is paid. With FundThrough, there’s no minimum number of invoices you need to fund and no maximum funding limit. And, there’s no strings attached after your customer pays their invoice — just convenient funding any time you need it.

 

Cons of Small Business Factoring

Like any type of financing, there are some perceived negatives of small business factoring, including:

  • Concerns about customer perception. Invoice factoring and redirecting payments is business as usual for many customers. In fact, it is used by many growing and successful companies, and not those in financial straits. If you’re concerned about your customer’s involvement, rest assured we treat your customer like our own.

  • Perception that it’s hard to record in accounting. If you’re unsure of how to account for factor transactions in your accounting software, don’t sweat! We walk you through it step by step. (Even if you don’t use QuickBooks for your accounting software, the same principles apply.)

The Pros and Cons of Invoice Financing for Small Business

Before signing a financing agreement, it’s important to be clear on the pros and cons of financing an unpaid invoice and taking on business invoice loans as a source of business funding.

Pros of invoice financing for small business

Some potential advantages of invoice financing for small businesses include:

  • No customer involvement. With invoice financing, customer involvement is not required. This allows you to manage customer relationships without third party intervention.
  • Can be faster than factoring. Since there’s no customer involvement, the approvals process for invoice financing is often quicker compared to invoice factoring and traditional forms of small business funding.
  • Convenient working capital. Invoice financing gets you the cash you need to run your business quickly, solving common cash flow problems with less stress.
  • Easy process. Thanks to AI, automation, and integration with accounting software, invoice financing can eliminate time-consuming paperwork associated with bank loans and other financing options, speeding up your access to working capital.


Cons of invoice financing for small business

Some potential negatives of invoice financing for small businesses include:

  • Heavy admin burden. The biggest difference with factoring vs financing is that you are on the hook for payment, not your clients. You’ll need to keep up with payments, just like if you were paying a bank loan. Depending on your cash flow issues, financing could make the issue worse – not to mention it also takes up time and focus managing accounts receivable and payments that could be better spent on your business.
  • Smaller capital limits. Invoice financing companies typically only offer limited access to funding, which might not be ideal if your business needs a larger boost of capital to bridge cash flow gaps such as covering operating expenses or to staff up for big projects.
  • Adds debt to your balance sheet. Since invoice financing is basically a loan, it counts as a liability on your books and adds debt to your balance sheet. 

Why Do Small Businesses Use Invoice Factoring or Financing?

Small businesses use invoice factoring or financing to bridge cash flow gaps arising from slow-paying customers.

Slow payments affect your small business in two significant ways:

  • They make it difficult to pay your bills and creditors on time, which puts your credit rating at risk.

  • They limit you from harnessing growth opportunities.


With the near-instant access to cash that invoice factoring offers, you can maintain positive credit ratings and a healthy cash turnover rate. Some ways factoring helps include:

  • Making payroll. One of the most common reasons to factor an invoice is to get quick cash upfront to cover payroll. However, you can factor an invoice for any expense; it’s certainly not limited to payroll.

  • Funding growth. Many of our clients fund invoices so that they can pay upfront costs associated with landing a big contract or taking on more customers.

  • Increasing peace of mind. If you’re like most business owners, you probably worry about your cash flow. Having a business funding option like factoring that’s always available ensures you don’t have to worry about meeting your financial obligations. You also don’t have to worry about payment collection, as the factoring company works with your customer to redirect payment. A good factoring company will contact you before reaching out to your customers in the event of late payment.

  • Debt-free financing. Invoice factoring is not a loan, which means that you’re not taking on expensive debt when you fund an invoice. You’re also not borrowing funds, you’re getting an advance on your invoice for work you’ve already completed.

  • Non-dilutive funding. Not only is invoice factoring debt-free financing, it’s also non-dilutive funding — meaning you’re not giving up any equity in your business!
Supplying nutritious snack bars to grocery chains across Canada, Made with Local Owner and Founder, Sheena Russell came to FundThrough because they needed to get paid faster. They partnered with FundThrough to ensure that their local honey and fruit farmers were getting paid asap, and to confidently expand to over 450 stores across Canada.
READ CASE STUDY →

Invoice Financing or Invoice Factoring: Which Is Best for Your Business?

We can’t make the decision for you, but we can give you the information you need to make the best choice for your business’ unique situation. Both invoice financing and factoring offer quick and easy access to capital.

Invoice financing is often the better option if your customer doesn’t accept factoring agreements and if you need funding more urgently than a few days.

Invoice factoring is better choice if you need higher funding limits (FundThrough offers unlimited funding!), don’t want to take on any debt, and don’t want to worry about repayments. (Full disclosure: FundThrough only offers invoice factoring.)

What to Look for in a Small Business Factoring Company

  • Experience with small businesses. The definition of small business is wide. The Small Business Administration in the U.S. defines it as employing fewer than 1,500 people with a max revenue of $41.5 million. You need a partner who can work with businesses at different stages and sizes, and understands your needs at every stage of growth.

  • Flexibility. The best invoice factoring companies will offer flexibility in how they handle your business, listening to your unique needs. Additionally, you want a factoring business that lets you fund on your terms — no funding obligations, no maximums, and no long-term commitments once the invoice is paid.

  • Quick and Efficient. The best small business factoring companies use technology and automation to make getting funded a seamless process. FundThrough’s invoice finance for small business platform boasts QuickBooks integration, automatically pulling in eligible invoices so you can get funded in just a few clicks.

  • Fee Transparency: Different factoring companies charge different funding rates, meaning the cost of invoice factoring varies. But not all companies are upfront about hidden fees – like initial account setups fees, service fees, or transaction fees – that can leave you with less funding than you planned for. See FundThrough’s pricing here.

  • Customer Service. Whoever you choose for your small business factoring needs should be invested in your success. At FundThrough, we offer dedicated account management, flexible solutions to get you funded, and treat your customer like our own.

Is Invoice Factoring Right for my Small Business?

In general, invoice factoring is right for your business if you suffer from cash shortfall due to invoices’ slow payments. That equals paid invoices on time in a short time frame.

Still, as with most business decisions, there are considerations. Some include:

Do you need quick access to working capital?

The best part of invoice factoring is quick accessibility. If you cannot afford to wait out the typical 30 to 90 days waiting period, invoice factoring offers a short-term financing solution.

Do you have a timely opportunity that requires capital?

This could be a big project or a chance to buy in bulk. If you need cash to take on the opportunity, invoice factoring for small business could be right for you.

Did the bank reject you or refuse to raise your limit?

If the bank won’t work with you because you don’t have a long enough financial track record, because you need more capital than they’re comfortable with, or if you can’t wait months for an approval, invoice factoring could be right for you.

Are your customers credit-worthy?

If your customers are established businesses with strong credit, factoring companies are more likely to approve them, making it more likely for you to get invoices paid quickly.

Find out if you’re a good fit for FundThrough by getting started here.

Am I a good candidate for invoice factoring?

Here are some things business invoice funding companies consider before offering you an advance.

  • B2B business: you must be a registered business selling goods or services to other businesses.

  • Service completion: invoice factoring is only available for goods or services that your clients have marked as complete.

  • Encumbrance-free invoice: since invoices are the only collateral in a factoring arrangement, encumbrances such as liens and tax balances can make it difficult to qualify for factoring – but definitely not impossible! FundThrough works with businesses who have liens and managed tax balances all the time.


Find out if you’re a good fit for FundThrough by getting started here.

Can Small Businesses Do Invoice Factoring with Bad Credit?

Yes. Invoice factoring is secured by the invoices you issue to your customers. As a result, factoring companies will often offer an advance on your invoices even if you have low or bad credit. A factoring company’s decision to extend an invoice advance mostly depends on your customer’s credit rating.

Our Approach to Working with Different Industries

FundThrough pays invoices in days for industries outside of this list as well.

Small Business Invoice Factoring FAQs

Your questions answered.

Factoring rates vary between 1% and 5%, depending on a combination of factors, including:

  • The size of your invoice. Some factors charge lower fees for larger invoices.

  • How fast your customers pay. Because factoring companies charge a fee per month, fast-paying clients can lower your factoring cost.

  • Your customer. Your customer’s creditworthiness (and credit risk) can have an impact on your invoice factoring rates.

  • Industry. Some small business factoring companies will charge more for industries that are perceived to be higher risk.

No, invoice factoring isn’t a loan. In an invoice factoring arrangement, you’re selling your invoices to the factoring company at a discount for upfront cash. Your customer pays the factoring company, rather than you paying back borrowed capital.

Invoice financing and factoring are similar in that they both allow you to use unpaid invoices as collateral to access cash, but how they work With invoice financing, a factoring company gives you cash for your unpaid invoices, and you are responsible for repaying the factoring company yourself. The terms include an agreed-upon repayment schedule, with a fee spread out across the payments. Your customer pays you according to the established payment terms.
 
With invoice factoring, you’re selling your unpaid invoices to a factoring company for a cash advance of the value of the invoice. You get cash for the invoice amount, less any fees, in a few business days. Instead of paying you, your customer pays the invoice amount to the factoring company according to the original payment terms. The key thing to keep in mind is that when you finance invoices, you have to make sure cash is available whenever a payment is due to the factoring company. When you factor invoices, you don’t have to keep as close of an eye on your accounts because the fee has already been withheld from the advance.

Recourse factoring is an invoice factoring agreement that stipulates the client is required to buy back any unpaid receivables from the factor after a specified period of time. The risk stays with the client.

With non-recourse factoring, the factor takes on the obligation of absorbing any accounts receivables that remain unpaid, so the client is at no risk. Non-recourse factoring is often more expensive than recourse.

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