1. Evaluate your needs
Determine how much you need to cover your immediate business expenses. Remember, when using an invoice factoring company, you lose a small portion of each invoice.
For example, let’s say you sell $15,000 worth of invoices to a factoring company with a 90% advance rate and a 2% factoring rate. You will receive $13,500 upfront and $1,200 after the invoice is paid, but this service will cost you $300 in total.
Before considering factoring, you might find more affordable financing solutions with a more traditional small business loan or a working capital loan.
2. Review funding qualifications
Qualifying for invoice factoring is typically easier than other types of small business loans. Here are the main factors invoice factoring companies consider when reviewing your application:
- Invoice history: You could be a good candidate for invoice financing if some of your customers consistently pay their invoices on time.
- Credit score: While invoice factoring companies might look at your credit score, they are more interested in your customer’s creditworthiness since that is how they will get paid.
- Monthly revenue: Some factoring companies might require a minimum volume of invoices each month. For example, Elevation Capital
requires at least $5,000 in monthly invoices to continue working with them.
- Time in business: Being in business for a more extended period can show factoring companies that you have a sustainable business model, reassuring them that income (and invoices) will continue coming in.
3. Research factoring companies
Read the fine print before signing a contract with an invoice factoring company. Many companies lure you in with the promise of incredibly low rates, only to add extra fees afterward. Understanding the breakdown of advance rates and factors, plus reading business lender reviews can help you find a reputable financing company that fits your needs.
4. Gather documents
Factoring companies will have their own list of business loan requirements, such as personal and business tax returns, bank statements, copies of current invoices, articles of organization/incorporation and payables aging reports. Some factoring companies may require a detailed business plan, although this is more common with regular business loans.
5. Submit and review offers
Factoring companies have their own process for getting a business loan, so contact a representative to inquire about next steps. You can typically receive funds within a day or two after the factoring company verifies and approves your invoices. Overall, this is a quicker process than traditional business financing.