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Building up a small business from scratch can be rough on your credit. There are plenty of times when money may not come in fast enough to cover bills and your personal or business credit can suffer. With bad credit, your sources of business funding can seem to dry up quickly and you may have to think outside of the small business loan box. One way many companies with poor credit meet their working capital needs is with invoice factoring.

Invoice factoring means selling your unpaid invoices to a factoring company at a discount in exchange for cash now. For example, if you own a business that sells goods or services to other businesses you probably have several unpaid invoices. These could be for substantial amounts of money but may not be due for 30 to 90 days. When you cannot wait that long for the capital and you do not have the best credit, invoice factoring can be a business-saving option.

Here’s how it works: you sell your unpaid invoices to a factoring company. They take a cut of the invoice – the factoring fee – typically between 1 percent and 5 percent. The rate will depend on several things like your sales volume, the creditworthiness of your customers, the invoice amounts. Then the company gives you a percentage of the cash for the invoice up front and gives you the rest (minus the factoring fee) upon the customers’ payment of the invoice.

Of course, there are some drawbacks and risks to this type of financing. While the factoring fee is only between 1 percent and 5 percent, the annual cost –the APR – of borrowing that money is actually much higher and can be anywhere from 12 percent to 60 percent. Be sure to inquire about the true APR before signing up. Also, it is important to know whether you are agreeing to a recourse or non-recourse factor. With a recourse factor if your customer does not repay the invoice you will have to buy it back from the factoring company or replace it with a more recent one. Non-recourse factors do not require you to buy back anything but you may be charged a higher fee for the risk.

Even though there are some reasons to be cautious, in many cases the benefits of invoice factoring can outweigh the risks when your business has less-than-perfect credit and you need cash fast.


Search for Small Business Loan Sources and receive your matched lender list
AND received FOUR free Business eBooks worth $39.95!
Search for Small Business Loan Sources