If you’re a small business owner frustrated by outstanding accounts receivables, you’re definitely not alone. Over 60% of invoices are paid late, and 20% are over two weeks late. Late payments can leave you short on cash, preventing you from paying your employees, making rent, or moving forward on important business opportunities.
Both invoice financing and invoice factoring are possible solutions to dealing with slow cash flow. However, invoice financing and factoring differ in important ways when it comes to the structure of the financing and how payment is collected from the customer. We’ll cover the similarities and differences here, as well as recommend some specific providers, so you can start improving your cash flow today.
What’s invoice financing?
Also known as invoice discounting, invoice financing refers to borrowing money against your outstanding accounts receivables. A lender gives you a portion of your unpaid invoices—usually 80% to 90%—up front, in the form of a loan or line of credit. Once your client pays the invoice, you’ll pay the lender back the amount loaned plus fees and interest. In this scenario, your business is still responsible for collecting outstanding money owed by your clients.
In some cases, the invoice financing provider will sync up with your accounts receivable systems behind the scenes. When your customer pays the invoice, they might automatically deduct their fees before forwarding you the balance. Invoice financing suits businesses that need money quickly and feel confident they can collect on the outstanding invoices owed to them by their customers.
Invoice financing example
Let’s say you’re ABC Wholesaler, a wholesaler for restaurants. You send a $5,000 invoice to Rita Restaurant for ingredients that you sold to her. The terms of the invoice are NET 30, so Rita has a month to pay. In the meantime, you need money to pay your staff, so you go to an invoice financing provider for an advance. They advance you 80% of the invoice—$4,000—up front.
You follow up with Rita for payment, and she pays within the month, sending you a check for $5,000. You keep $850 for yourself and send the remaining $4,150 to the invoice financing company. In total, you receive 97% of the invoice value—$4,850. The invoice financing company receives $150 in fees.
What’s invoice factoring?
Invoice factoring is a form of invoice financing—with a twist. An invoice factor purchases the accounts receivables you’re owed and takes over-collecting from your clients. With invoice factoring, the lender will pay you a percentage of the total outstanding invoice amount upfront. Then, they’ll take responsibility for collecting the full amount. Once they collect the full amount, they’ll advance you the difference, keeping an agreed-upon percentage for their service. Your clients will deal with the factoring company to make their payment in this scenario, not you.
Accounts receivable factoring might be suitable for businesses with outstanding accounts receivables in the 60 to 90 days or longer time frames, or for those who don’t want to recover outstanding receivables on their own. However, since you offload collection responsibilities to the invoice factoring company, invoice factoring is typically more expensive than invoice financing. The factor accepts the risk that your customer might not pay the invoice, so they’ll charge more.
If you use invoice factoring, make sure you’re okay with someone else interfacing with your customers for payment. The fact that you’re not handling the payment yourself might give away that you’re using financing. But some factoring companies will be as vague as possible, so it seems like they are a representative of your company when they contact customers.
Invoice factoring example
Assume that you’re ABC Wholesaler again and that you’ve sent a $5,000, NET 30 invoice to Rita Restaurant for an order of fresh ingredients. You need the money soon, so you contact an invoice factoring company. The factor purchases your invoice and sends you $4,250 up front to use for any business purposes.
Then, the factor follows up with Rita to collect payment on the invoice. She pays before the deadline and sends her check directly to the factoring company. The factor deducts their fee of 4% and sends you $550. In total, you receive 96% of the invoice value—$4,800. The factor receives $200 in fees.
Invoice factoring vs. invoice financing summary
Typical Initial Advance
80% of the invoice value
85% to 90% of the invoice value
1% to 3% per month
2% to 4.5% per month
Who Owns the Invoice?
The factoring company
Who Collects on the Invoice?
The factoring company
Advantages of invoice financing and factoring
Whether you’re using invoice financing or invoice factoring, there are some benefits to this form of business finance—primarily that it can smooth out cash flow issues very quickly. Businesses can use invoice financing and factoring to pay staff and regular bills without having to wait for payment on outstanding invoices to arrive.
Also, whether you’re using invoice factoring or invoice financing, it might be the only option available to you if you can’t get other types of business financing. Since these lenders look more at your invoices and less at your business’s financial health and your credit, you might find this type of financing easier to secure than others.
A benefit to invoice factoring, in particular, is that it guarantees at least some of your outstanding accounts receivables and removes the headache of collections from the already busy life of a business owner. If your business deals with numerous late-paying customers or unpaid invoices, invoice factoring can be an option to ensure that you do get at least some of what’s owed to you, giving you the cash necessary to stay afloat.
Another thing to note with invoice factoring is the limited risk to your business of not collecting outstanding payments. Once the factoring company takes over responsibility for collecting the receivables and you have your cash in hand, they’re taking over the risk that your clients won’t pay. Unlike a business loan, where you have to make payments whether your clients pay you or not, invoice factoring removes that risk from your books.
Disadvantages of invoice financing and factoring
While invoice financing might seem like a simple and fast way to deal with cash flow issues, it can be expensive, especially since your fees will be dependent on when the customer pays you back. Typically, a certain percentage—around 1% to 4.5%—is charged each month that the invoice remains outstanding.
Additionally, as we mentioned above, if you choose the factoring financing route and the lender deals with collecting the outstanding amounts from your customers, there’s no hiding the fact that you’ve entered into a factoring agreement. This might be a signal to customers that your business is in trouble. Fortunately, most factoring providers want your continued business, so they will try to keep things as discreet as possible and portray themselves as a representative of your team.
The bottom line
Many small business owners feel frustrated by the difficulties of meeting current expenses, debt repayments, and other financial obligations. First, you can try the simplest, most effective ways to manage your cash flow. For example, send invoices early, offer discounts for customers who pay early, and use online accounting and payment systems to make it easier for clients to pay. It might be prudent to try these tactics first. If cash flow still doesn’t improve, then consider invoice financing or factoring, or another type of business financing.
Chargeback Fraud: What Small Businesses Need to Know
Chargeback fraud occurs when a customer disputes a credit card charge with their bank without following proper procedures or by giving reasons that are false. A chargeback is a process by which a customer requests reimbursement for a disputed credit card transaction that meets certain criteria under federal law; the merchant who received payment from the disputed transaction loses the money from the transaction and also has to pay a chargeback fee, typically $20 or more. When consumers request chargebacks for false reasons or accidentally, the impact on small businesses can add up quickly.
But small businesses can fight suspected chargeback fraud, and there are a few practices you can put into place to try to avoid chargebacks that result from simple confusion.
Nerdy tip: While illegitimate chargebacks are colloquially referred to as chargeback fraud, they often don’t quite fit the legal definition of fraud because it’s difficult to prove intent, and in some cases, the dispute might be accidental. In this article, chargeback fraud is referring broadly to all types of chargebacks that aren’t legitimate or don’t follow proper procedures.
How chargeback fraud happens
Chargebacks are a way for people to refute unauthorized transactions through their banks rather than directly with a merchant. Under federal law, there are three valid types of credit card disputes:
Unauthorized use, when someone charges a person’s credit card without their permission.
Billing errors, when a merchant incorrectly charges a consumer or charges them for a product they didn’t receive.
Right to withhold payment, when a customer has attempted to address a complaint with the merchant but hasn’t been able to resolve the issue.
But people sometimes use these protections to circumvent merchant refund policies and get their money back for illegitimate reasons. In these cases, merchants can file a counter-dispute. Reasons that consumers commonly give for chargebacks include not receiving an item, a transaction being unauthorized or a service continuing to charge them despite their attempts to cancel. But a buyer’s actual reason might differ: Maybe they want to keep the item without paying for it, they regret making a purchase, they waited too late to return the item or they honestly forgot they made the purchase.
How it can affect small businesses
Regardless of which type of fraud occurs, when people bypass merchants to request an illegitimate chargeback, it affects small businesses in many ways.
The most obvious loss is the potential profit from the product or service. With a chargeback, the customer is essentially refunded the cost of the product, which means a merchant is out an item without being paid for it.
Merchants often have to pay chargeback fees as well. When a bank processes a chargeback, they often charge the merchant a fee to penalize them for what the bank views as an illegitimate transaction. Fees can start out around $20 but can grow if a small business frequently experiences chargebacks. Small businesses are also paying the transaction fee for processing the payment, which is more money out of their cash box.
Higher risk category
A high frequency of chargebacks can lead a merchant to be labeled as a high-risk business. Small businesses that are classified as high-risk often pay higher per-transaction fees and might be canceled by their current payment processor. This can lead to a bigger cut in profit and complicate payment processing options.
What small businesses can do
Successfully disputing chargebacks is difficult, but possible. A 2021 survey of more than 400 merchants from Chargebacks911, a company that helps businesses reduce their chargebacks, found that while businesses respond to around 43% of chargebacks, an average of only 12% were recovered successfully. To improve your odds of success, try this:
Chargeback responses have deadlines, and you’ll be out of options if you wait too long to respond. Gather your information and respond to the chargeback in a timely manner. But not so quickly that you overlook information. Give yourself time to be thorough.
Talk with the customer
Try to identify the issue and learn what is going on beyond what the card issuer or bank tells you in the chargeback notification. Keep the conversation friendly, and report the conversation in your documentation to the card issuer or bank to inform them of any relevant information the customer explained to you to support your case.
Prove your point
Merchants are able to write a rebuttal letter for a chargeback. If you have time, craft a letter that clearly states your evidence for why the chargeback is fraudulent and why the charge is legitimate. Keep a professional voice and provide evidence of your argument, including pictures and screenshots.
How to avoid chargeback fraud
Small businesses can take steps to decrease their odds of experiencing illegitimate chargebacks, including:
Ensure the charge on a statement matches your business name
Some people will report a charge as unauthorized if they do not recognize the business name on their financial statement. You can avoid this by ensuring that your business name appears correctly on transactions. If you need to update this information, contact your payment processor. If you can’t update it and it’s not identical to your business name, notify the customer within the email confirmation so they know what to expect.
Using tools and services that track shipments and show when a product is delivered gives you more leverage to dispute a chargeback when a customer asserts that a product was not delivered.
Make it easy to return items
By relaxing your window for returns, you make it simpler to return items for a refund. Customers might be more inclined to work with you if they know they can still return an item instead of calling their credit card issuer after a short window has passed. Making contact methods easy to locate and responding to upset customers might help the process as well.
How to Get a Loan to Buy a Business
Not everyone wants to take on the challenge of building a business from the ground up. An attractive alternative can be to step into a business that’s already up and running by purchasing it from the current owner. Some advantages of buying a business may include easier financing, an established customer base and an existing cash flow.
Buying a business is different from buying a franchise. Franchises have a set business model that’s proven to work. However, when you buy an independently operated business, it’s important to show the lender that you, your previous business experience and the business you want to buy are a winning combination.
What lenders look at when you want to buy a business
Because lenders can view the performance record of an existing business, it’s typically easier to get a loan to purchase an existing business compared with startup funding. However, your personal credit history, experience and details about the acquisition business still matter.
Your personal credit and experience
Through credit reports and credit scores, lenders are able to assess how you’ve managed debt in the past and potentially gain insights into how you will handle it in the future. Your education and experience will also be evaluated.
Solid credit history: Lenders look to see if you have a history of paying your debts. Foreclosures, bankruptcies, repossessions, charge-offs and other situations where you haven’t paid off the full amount will be noted.
Business experience: Having worked in the same industry as the business you want to purchase is helpful. Related education can also be viewed as a positive.
Other businesses you’ve owned
Having a track record of operating other successful businesses can have a positive influence on lenders when it comes to buying a new operation.
Record of generating revenue: Business financial statements can help a lender document that your current or past businesses were well-managed and turned a profit.
Positive credit record: Lenders review business credit scores and reports to verify creditworthiness and to identify liens, foreclosures, bankruptcies and late payments associated with your other businesses.
The business you want to buy
Just because a business is operating doesn’t mean it’s a good investment. Lenders will ask for documentation, often provided by the current owner, to assess the health of the operation.
Value of the business: Like you, your lender will want to ensure that you’re buying a business that has value and that you’re paying a fair price.
Past-due debts: Lenders will be interested in the business’s past-due debts, which may include liens, various types of taxes, utility bills and collection accounts.
Most lenders will let you know what they want included in the loan application package, but there are some personal documents that are typically requested, as well as ones related to the business you want to purchase.
The following documents are used to evaluate your personal finances, business history and plans for operating the business after its purchase:
Personal tax returns.
Personal bank statements.
Financial statements for any of your other businesses.
Letter of intent.
Documents from the current business owner will also be evaluated. Some common ones requested by lenders include:
Business tax returns.
Profit and loss, or P&L, statements.
Business balance sheet.
Proposed bill of sale.
Asking price for inventory, machinery, equipment, furniture and other items included in the sale.
Where to get a loan to buy a business
Compared with finding a loan to start a business, getting funding to buy an existing business may be easier. Here are three popular funding options to check into for a business loan:
Banks generally offer the lowest interest rates and best terms for business loans. To qualify for this type of loan, you’ll typically need a strong credit history, plus the existing business will need to be in operation for a certain minimum of years and generate a minimum annual revenue amount set by the lender.
If borrowers don’t qualify for a traditional bank loan, then SBA loans, ones partially guaranteed by the Small Business Administration, may be the next option to explore. Because there is less risk to the lender, these loans can be easier to qualify for. Banks and credit unions frequently offer SBA loans in addition to traditional bank loans.
Online business loans
Another option to consider is online business loans. Online business loans may offer more flexibility when it comes to qualification, compared with bank and SBA loans. Minimum credit score requirements can be as low as 600, and in a few cases lower. Generally, interest rates are higher than what’s available with a traditional bank loan.
Accounts Receivable Financing: Best Options, How It Works
Accounts receivable financing, also known as invoice financing, allows businesses to borrow capital against the value of their accounts receivable — in other words, their unpaid invoices. A lender advances a portion of the business’s outstanding invoices, in the form of a loan or line of credit, and the invoices serve as collateral on the financing.
Accounts receivable, or AR, financing can be a good option if you need funding fast for situations such as covering cash flow gaps or paying for short-term expenses. Because AR financing is self-securing, it can also be a good choice if you can’t qualify for other small-business loans.
Here’s what you need to know about how accounts receivable financing works and some of the best options for small businesses.
How Much Do You Need?
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How does accounts receivable financing work?
With accounts receivable financing, a lender advances you a percentage of the value of your receivables, potentially as much as 90%. When a customer pays their invoice, you receive the remaining percentage, minus the lender’s fees.
Accounts receivable financing fees are typically charged as a flat percentage of the invoice value, and generally range from 1% to 5%. The amount you pay in fees is based on how long it takes your customer to pay their invoice.
Here’s a breakdown of how the process works:
You apply for and receive financing. Say you decide to finance a $50,000 invoice with 60-day repayment terms. You apply for accounts receivable financing and the lender approves you for an advance of 80% ($40,000).
You use the funds and the lender charges fees. After receiving the financing, you use it to pay for business expenses. During this time, the lender charges a 3% fee for each week it takes your customer to pay the invoice.
You collect payment from your customer. Your customer pays their invoice after three weeks. You owe the lender a $4,500 fee: 3% of the total invoice amount of $50,000 ($1,500) for each week.
You repay the lender. Now that your customer has paid you, you’ll keep $5,500 and repay the lender the original advance amount, plus fees, $44,500. You paid a total of $4,500 in fees, which calculates to an approximate annual percentage rate of 65.7%.
Because accounts receivable financing companies don’t charge traditional interest, it’s important to calculate your fees into an APR to understand the true cost of borrowing. APRs on accounts receivable financing can reach as high as 79%.
Accounts receivable financing vs. factoring
Accounts receivable financing is often confused with accounts receivable factoring, which is also referred to as invoice factoring. Although AR financing and factoring are similar, there are differences.
With invoice factoring, you sell your outstanding receivables to a factoring company at a discount. The factoring company pays you a percentage of the invoice’s value, then collects payment directly from your customer. When your customer pays, the factoring company gives you the rest of the money you’re owed, minus its fees.
With accounts receivable financing, on the other hand, your invoices serve as collateral on your financing. You retain control of your receivables at all times and collect repayment from your customers. After your customer has paid their invoice, you repay what you borrowed from the lender, plus the agreed-upon fees.
Invoice factoring can be a good financing option if you don’t mind giving up control of your invoices and you can trust a factoring company to professionally collect customer payments. If you’d rather maintain control of your invoices and work directly with your customers, AR financing is likely a better option.
Best accounts receivable financing options
Accounts receivable financing is usually offered by online lenders and fintech companies, many of which specialize in this type of business funding. Certain banks offer AR financing as well.
If you’re looking for a place to start your search, here are a few of the best accounts receivable financing companies to consider.
A division of the Southern Bank Company, altLINE is a lender that specializes in AR financing. AltLINE offers both accounts receivable financing and invoice factoring, working with small businesses in a variety of industries, including startups and those that can’t qualify for traditional loans.
AltLINE offers advances of up to 90% of the value of your invoices with fees starting at 0.50%. To get a free quote from altLINE, call a representative or fill out a brief application on the lender’s website. If you apply online, a representative will contact you within 24 hours.
AltLINE’s website also contains a range of articles for small-business owners, covering AR and invoice financing, payroll funding, cash flow management and more. AltLINE is accredited by the Better Business Bureau and is rated 4.7 out of 5 stars on Trustpilot.
1st Commercial Credit
1st Commercial Credit offers accounts receivable financing in addition to other forms of asset-based lending, such as invoice factoring, equipment financing and purchase order financing. The company works with small and medium-sized businesses, including startups and businesses with bad credit.
With 1st Commercial Credit, you can finance $10,000 to $10 million in receivables with fees ranging from 0.69% to 1.59%. You can start the application process by calling a sales representative or filling out a free quote form on the company’s website. After your application is approved, it typically takes three to five business days to set up your account, then you can receive funds within 24 hours.
1st Commercial Credit is accredited by the Better Business Bureau and has an A+ rating.
Porter Capital is an alternative lender specializing in invoice factoring and accounts receivable financing. The company also has a special division, Porter Freight Funding, which is dedicated to working with businesses in the transportation industry.
With Porter Capital, you can receive an advance of 70% to 90% of your receivables and work with an account manager to customize a financing agreement that’s unique to your business. Porter funds startups and established businesses, offering fees as low as 0.75% monthly.
You can provide basic information about your business to get a free quote and receive funding in as little as 24 hours. Although Porter Capital isn’t accredited by the Better Business Bureau, it does have an A+ rating; the company also has 3.7 out of 5 stars on Trustpilot.
Although AR financing and factoring are distinct, many companies blur the lines between the two. As you compare options, make sure you understand the type of financing a lender offers.
If you decide that invoice factoring may be a fit for your business, you might consider companies like FundThrough, Triumph Business Capital or RTS Financial.
Find and compare small-business loans
If accounts receivable financing isn’t right for you, check out NerdWallet’s list of the best small-business loans for business owners.
Our recommendations are based on the market scope and track record of lenders, the needs of business owners, and an analysis of rates and other factors, so you can make the right financing decision.