Small business owners face numerous challenges every day, but one of the most common is customers that are slow to pay. Maybe they’re experiencing cash flow problems or just forgetful with their bills, but their sluggish approach to payments can severely impact your business.
Working capital can run desperately low when customers don’t pay on time. You could apply for a loan to cover the shortfall, but this isn’t a long-term solution for late payments. Many small business owners turn to invoice factoring to increase their liquidity or make payroll, but this type of financing has its pros and cons. This guide will look at the top five invoice factoring companies and how they can help your small business thrive in an uncertain marketplace.
What Is Small Business Invoice Factoring?
Invoice factoring — also called accounts receivable factoring — is a form of financing whereby a small business sells the value of their outstanding invoices to a third party at a discount in return for an immediate cash advance. Most invoice factoring companies will advance their borrowers between 80-90% of the value of their invoices.
Payments for the outstanding invoices are then directed toward the factoring company. For each week that the invoices go unpaid, the company will charge between one and three percent of the total value of the invoices as a factoring fee, which is deducted from the 10-20% that was not paid to the business owner as an advance. Once all the invoices have been paid, and the factoring fee is deducted, along with any origination fees charged, the factoring company will return the remaining value of the invoices to the business owner.
Differences from Invoice Financing
Invoice factoring is distinguished from the better-known invoice financing in that your business isn’t borrowing against the value of the invoices, but selling them at a discount to the factoring company to collect on. Invoice factoring is more often a long-term relationship, whereby you agree to sell a minimum value of invoices to the factoring company each month. One-off or short-term invoice factoring arrangements will likely have much higher fees than ones that recur every month.
The 5 Best Invoice Factoring Companies
There are dozens of factoring companies, but each offers different terms that may or may not be beneficial for your business’s needs. These are five of the best invoice factoring companies and who they’re best suited for.
Breakout Capital – Best for Small Businesses Needing Fast Approval
Breakout is one of the best options for smaller businesses that need cash right away, as they can approve your application in a matter of hours and provide funding the next day. They’ll advance you up to $1,000,000 with factoring fees ranging from 1-4% on top of an origination fee of 2.5%. Breakout only works with businesses that have been operating for at least a year and have revenues of at least $10,000.
Triumph Business Capital – Best for Non-Recourse Factoring
Invoice financing can be either recourse or non-recourse. Recourse factoring requires the borrower to pay back any advance given on an invoice that goes unpaid by the customer, while with non-recourse factoring, the lender takes the loss. To account for that risk, companies offering non-recourse factoring raise their factor fee. Triumph Business Capital offers funding up to $20,000,000 with a 90% advance but has a discount rate of 1-4% per month. They also require much higher annual revenue — a minimum of $100,000 and a time in business of one year.
FundThrough – Best for Medium-Sized Businesses Needing Fast Approval
Similar to Breakout Capital, FundThrough can approve your application in a few hours and provide next-day funding. However, they offer higher factoring of up to $5,000,000, making it a better option for medium-sized businesses. Their factoring fee starts at 2.5%, but they do not charge an origination fee.
TCI Business Capital – Best for Flexibility
Most invoice factoring agreements are multi-month with set terms, but TCI Business Capital regularly reevaluates to see if they can give you a lower rate due to faster-paying customers or higher factoring volume. The downside is they require an annual revenue of $600,000, which can be problematic for smaller businesses.
altLine – Best for Short-Term Arrangements
altLine can factor up to 90% of $4,000,000 worth of invoices each month. Their fees start as low as 0.5% for invoices paid within one month and up to 5% for longer repayment periods. They don’t bill you for an origination fee but do charge an extra 1% for expedited funding.
Alternatives To Invoice Factoring Companies for Small Businesses
Invoice factoring is a great option for small business owners that need working capital immediately, but it’s not for everyone. It’s a relatively expensive form of financing, and even the best invoice factoring companies are unlikely to approve businesses that aren’t willing to make a long-term commitment. Additionally, having an invoice factoring company collect payments can damage client relations.
A fixed-rate business loan is one lower-cost option that’ll still put working capital in your pocket. LendThrive can approve you for up to $150,000 in under 24 hours, with flexible payback periods that never charge a fee for early repayment. Apply today and see how financing from LendThrive can help your business grow and succeed.