As a business person, I am always interested in new financial products that help me finance my various businesses. I just found out about this new way to get small business financing without the hassle and waiting time of SBA loans, nor the shady and high-interest rates of some alternative lenders, namely sketchy factoring.
Every day my manager would check the mailbox and hope for a check to pay the bills, often disappointed. Instead, we applied and got an account at Fundbox, which got good reviews. Now directly from within a mobile phone app we can finance any invoice in our online accounting system Quickbooks and get the money into our checking account the next business day. Now our bills get paid on time, avoiding late fees and no longer do we have to pressure our customers to pay – avoiding those uncomfortable collection phone calls I hated to make!
I had heard of old-fashioned “factoring” as a finance option. This is where lenders, some a bit shady, would “buy” your open invoices and then they would proceed to collect from your customers. There were a few things that went wrong here.
Investopedia defines a factor as a financial intermediary that purchases receivables from a company. Thus a factor is essentially a funding source that agrees to pay the company the value of the invoice less a discount for commission and fees. The factor advances most of the invoiced amount to the company immediately and the balance upon receipt of funds from the invoiced party.
First, they tacked on all sorts of fees and interest charges which made this type of short-term capital very expensive. Secondly, there was the often customer relationship destroyer of aggressive collections by the factor. Thirdly was the invasion of privacy revealing your company financing to your competitors who could use it to discredit you in your industry. As such I dismissed this financing option right away.
Now smart lenders have reimagined this type of financing in a new and better model.
Instead of the factoring system, modern lenders use invoice financing to lend businesses money at reasonable rates, in a line of credit type of revolving fund.
I liked how they removed the connection between the factor and my customer. Invoice financing, in most companies, do not contact your customer ever and your banking needs are kept private away from your competitors and industry gossip mill.
Wrongly I had assumed that this type of financing would be only open to manufacturers who sold to large companies (Walmart and Target, etc). Happily, I was wrong. Even small companies such as my web design agency with unpaid invoices from other small businesses are now eligible.
For example, last month my internet marketing and web design agency had over $50,000 in outstanding invoices that we “financed” and got cash advance. This type of small business financing is especially advantageous for new companies who have little or poor business credit because the lender does not use the owner personal credit ad the sole determining factor for approval. Usually, your customer’s credit, whom you are invoicing, is a greater factor in financing approval than your credit history – business or personal.
Each lender has slightly different rules and regulations regarding their invoice financing, sometimes called account receivables financing.