Last Updated on October 28, 2022
For a small business, delayed invoice payments can be seriously damaging. Late customer payments and thin margins can hurt your finances, not to mention create a frustrating cycle of negative cash flow and mounting debt.
To grow your small business and stay competitive among your peers, you need cash to make payments, offer products or services, and meet payroll obligations – this is where small business factoring comes in.
In this article, we discuss how small business factoring works, its benefits, and how it compares to other financing alternatives. Read through to learn how altLINE’s factoring services can give your company the cash you need to grow your business!
What Is Small Business Factoring?
Small business factoring is when you sell unpaid invoices to a third-party company like altLINE for a cash advance. Small businesses usually use factoring when customers pay with invoices to shorten payment delays that may cause negative cash flow. Through small business factoring, you can access working capital when needed without waiting on customers to pay.
Benefits Of Invoice Factoring For Small Businesses
Small business factoring provides cash advances to unlock funds when customers delay payment. Check out how invoice factoring can help you access cash when necessary:
Get Your Accounts Receivable Invoices Paid In Days, Not Months
The best small business factoring companies fund your invoices within 1 or 2 days. This means you typically receive up to 90% of your money ASAP instead of in 30, 60, or 90 days.
Access Capital To Grow Your Business While Maintaining Equity
As a small business owner, you may need to sacrifice equity or assets to fuel company growth. However, invoice factoring sets you up for long-term success. Small business factoring provides quick cash necessary to pursue growth opportunities, pay debts, and fulfill payroll obligations while keeping your equity intact.
Get Cash When You Need It Most
Overdue invoices and late payments can create extra stress when your cash reserves are low. Invoice factoring offsets late payments to increase cash flow, ensuring your business stays financially healthy.
How Does Small Business Factoring Work?
Factoring small business invoices through altLINE works by providing cash advances to finance your company’s initiatives. Submitting your invoices for factoring also softens the financial blow of late customer payments. Instead of waiting on customers to pay their invoices, you can use our factoring services to get cash whenever you need it.
Here is how to apply for factoring financing for small businesses with altLINE:
Submit Your Unpaid Invoices
altLINE accepts all types of small business invoices. That said, we favor invoices for creditworthy customers and medium or large businesses. We do not factor invoices for customers who consistently make late payments.
If your invoice turnover time is between 30 and 90 days, your receivables are well-positioned for factoring.
altLINE Advances Up To 80-90% Of The Invoice Face Value
You can generally expect a factoring rate of 80%-90% of each invoice’s face value and receive the cash advance between 24 and 48 hours of submission to altLINE. The exact timing of your cash advance deposit generally depends on when your customer receives the goods or services you sell.
altLINE Helps Collect Payment For Your Outstanding Invoices
Our team supports your collection efforts by providing a secure lockbox for the money and reporting payment progress through our customer portal. If issues arise, we can communicate with customers to resolve them, ensuring you maintain good business relationships.
altLINE Pays Out The Remaining Unpaid Invoice
After collection, we will deduct our fee (typically 1-5% of your invoice) and transfer the remaining invoice value to your bank account.
Uses For Your Factoring Cash Advance
Receiving cash advances from small business invoice factoring means you do not have to wait on customer payments to grow your business. Instead, you can eliminate long payment cycles and unlock capital to grow, accelerating business development.
Here are some ways to use small business factoring cash advances:
Paying employees on time is crucial to running a successful small business. Late salary payments caused by delayed invoices often reduce productivity and increase staff unhappiness. Invoice factoring cash advances ensure you can fulfill payroll obligations on time, improving their productivity and satisfaction.
Take On New Orders
You should not be forced to wait on customer payments to take new orders and grow your business. Fortunately, invoice factoring provides the cash needed to buy the necessities to complete more jobs to grow your business – all without sacrificing assets or equity.
Pay Operating Expenses
Negative cash flow makes it hard to pay for business expenses like building maintenance, transportation, and permits. Invoice factoring offers cash advances so you can pay these obligations without selling assets or equity.
Small Businesses We Fund And Finance
altLINE offers factoring services for small businesses of all kinds. Here are some examples of small businesses that may benefit from our factoring services:
- Staffing firms
- Handyman and repair services
- Woodworking services
- Freelance programmers and web developers
- Landscaping and gardening services
- Photographers and videographers
- Car detailing services
- Janitorial and commercial cleaning services
- Consultation businesses
- Flower shops and delivery services
Factoring Your Small Business Invoices vs Other Funding Options
Aside from small business factoring, you have a few other options when it comes to funding your business. What choices do you have, and how do they fare against invoice factoring? Here is a detailed breakdown and comparison:
Small Business Factoring vs Bank Line Of Credit
Many small businesses seek a line of credit as their first financing solution. However, small businesses may have a harder time qualifying for one because asset portfolio determines eligibility.
Most small businesses do not have many assets, so you may be stuck with lower lending limits that are not enough to fund growth. You may not even qualify for a line of credit altogether.
Invoice factoring is typically better for companies with few fixed assets because the financing company looks at your customers instead of your fixed assets. If you work with an established customer base, factoring companies will give you enough working capital when banks cannot.
Small Business Factoring vs ACH/MCA Loans
ACH (automated clearing house) and MCA (merchant cash advance) loans offer easy qualification and fast funding, making them popular for small businesses.
However, ACH and MCA loans’ speed and ease of qualification come with high interest and lender fees that can go up to 60% of your initial amount. If you mismanage ACH or MCA loans, you can get into debt that your company may not recover from.
Small business factoring is usually safer because you are putting invoices up as collateral, meaning customers will eventually repay your cash advance. Therefore, taking invoice factoring gives you peace of mind that you would not have with an ACH or MCA loan.
Small Business Factoring vs Quick Pay Discounts
Offering discounted rates to customers who pay quickly can improve your cash flow when needed. However, this method heavily depends on your customers’ priorities.
If the customer prefers having more cash on hand or thinks your discount is too low, they will ignore the offer and pay when the invoice is due, leaving you low on cash and unable to grow your business. This uncertainty makes quick pay discounts a very unpredictable method of improving cash flow.
Small business factoring offers more certainty because as long as your invoices are approved, you will get cash advances on them.
Typical Factoring Rates And Fees
Small business factoring fees depend on how much you plan to factor and how long customers take to pay. We usually give you better rates if you factor more amounts and get customers to pay faster. We also consider other criteria like how long your company’s been in business, customer base diversity, and overall customer credit.
altLINE charges two types of fees:
- Initial fee: Your initial fee covers the invoice processing expenses for an initial period of time (typically the first 30 days) and costs up to 3.50% of your invoice’s face value.
- Incremental fees: Your incremental fees pay for the time altLINE’s cash is out the door beyond the initial period and cost up to 1.50% of your invoice’s face value per charge.
Requirements To Apply For Small Business Invoice Factoring
Want to apply for our small business factoring service? Here is what you need to get approved for invoice factoring with altLINE:
List Of Existing And Potential Customers
To qualify for small business factoring, we need a list of your existing and potential customers. altLINE needs this list to review their credit quality and determine factoring eligibility.
When applying for a small business factoring contract, you must complete a form. We also require these documents enclosed with your application:
- Business ownership identification
- Personal identification
- Employer Identification Number
- Customer contracts
- Articles of incorporation and other relevant corporate documents
Accounts Receivable Aging Report
An accounts receivable aging report records your outstanding invoices categorized by their due dates. altLINE needs this report to research customer payment behaviors and decide whether they are eligible for factoring. We will factor invoices that are up to 90 days outstanding, but invoices where customers state they cannot pay may be ineligible for factoring.
Frequently Asked Questions About Factoring For Small Business Owners
Here are some common questions about factoring for small businesses answered:
Do you need to run a credit check before getting started?
altLINE runs a credit and background check on all small business owners. However, there are no minimum credit thresholds for approval. Background checks are reviewed for financial-related crimes or felonies. In the event a borrower has a spotty background, approval with altLINE may be in question, but in the event the borrower is disqualified, altLINE will often work with the borrower to identify a small business factor that is willing to help.
Do you require UCC filings when factoring small business invoices?
Upon executing a term sheet, altLINE will file a UCC on the client’s business. This UCC filing allows altLINE to properly secure the collateral (i.e. the invoices) it plans to advance against when the factoring facility is in place. UCC filings are an integral part of any form of lending.
Is small business factoring a debt or loan?
Small business factoring is neither debt nor a loan. Invoice factoring is the sale of your invoices to a third party. The money advanced against these invoices will be repaid by your customers.
However, altLINE is a recourse factor, so you may need to pay the cash advance back if your customer fails to pay their invoice.
Do you offer non-recourse small business factoring?
altLINE only offers recourse small business factoring. While you must repay the cash advance if your customer fails to pay, recourse factoring structures often allow for factors to extend lower rates and larger credit limits on your customers.
Jim is the General Manager of altLINE by The Southern Bank. altLINE partners with lenders nationwide to provide invoice factoring and accounts receivable financing to their small and medium-sized business customers. altLINE is a direct bank lender and a division of The Southern Bank Company, a community bank originally founded in 1936.