What is invoice factoring?

what is invoice factoringGenerally when people hear the word factoring, they think of 8th grade math class. But if you’re in business for yourself and bill your customers, you’ve probably heard of factoring. If not, it’s very important to understand what invoice factoring is. Whenever you bill your customers for payment at a later date, you create an invoice. As your customers pay, you close out each invoice and mark it as “paid”. However should the need arise for quicker payments, you can factor your invoice for cash up front.

What is Invoice Factoring?

Invoice factoring is the process of selling your unpaid invoices to a 3rd party finance company. The finance company is usually called a factor or factoring company. In exchange, you receive payment of the invoice up front. The factor will provide 80-90% of the invoice total up front, and collect from your customer. Upon the factor’s receipt of payment from your customer, they rebate the remaining 10-20% (known as the “reserve”), minus their factoring fee. Factoring fees are generally 1-3% of the invoice value itself.

Is Invoice Factoring a Loan?

Establishing an invoice factoring facility with a factor usually is not a loan. However it’s important to understand the differences between invoice financing vs factoring. In short invoice financing is obtaining a loan that is collateralized by your invoices, and invoice factoring is where your business outright sells any and all claims on the invoice payment to the factoring company. Not only is it important to understand the different types of financing mechanisms, but you should also learn to identify loan products disguised as factoring. If you’re not looking for a product that acts like a loan, make sure you obtain a non recourse factoring agreement with a factor.

Why or When Should I use Invoice Factoring?

Invoice factoring is a great cash flow solution for business owners in need of short term working capital who are experiencing a rapid growth in sales, need to buy new inventory, or simply want to match the timing of their income and expenses. Additionally, as you’re diversifying your capital stack, it’s important that you find funding for your business that fits your needs. For example, if you have a short-term capital need, there is no reason to take on long-term debt or sell equity. You can easily monetize your unpaid invoices for immediate working capital.

Are you new to invoicing? Download our simple invoice template today!

A Simple Invoice Template Explanation and FREE DOWNLOAD

Editors note: we’ve received several requests from potential clients recently asking us what a sample invoice would look like. So we thought we’d offer up a post with a free download of a simple invoice template.


Invoicing Clients 101


Invoicing clients requires attention to detail, so you don’t screw up collecting money that is owed to you. It can also be a boring, monotonous, and confusing process. In order to streamline any questions or confusion you might have, we’ve created a simple invoice template that can serve as an example of what your invoices should look like or include. Below is a screenshot of the invoice, and a brief explanation of how to fill everything in, followed by a link to download this for yourself. After you download it, create copies and use it as many times as you want. If we’ve jumped ahead, please check out last week’s blog post about exactly what an invoice is.

Directions for our Simple Invoice Template


simple invoice template

Easy as 1, 2, 3


  1. Anywhere you see text, you can edit. Those areas include your Company Name, the invoice number, date, your address in the upper right hand corner, a space for comments, and item name and description.
  2. You can also edit the total quantity, unit price and total due for each line item. Note however since this simple invoice template is in Word, you will need to manually calculate each of these. Again, this is just an example and not the ideal invoice to use.
  3. Print to PDF and send electronically, or print and send via mail.
  4. Always be sure to number your invoices consecutively.


Final Thoughts


Should the need arise for any questions on your invoicing needs, let us know. We’re happy to help. It’s also best to keep track of everything in an online accounting platform such as Quickbooks.

For your free invoice template, download it below by clicking the Simple Invoice Template link below.



Merchant Cash Advance Rates: Explained

merchant cash advance ratesIf you’re a small business owner, you’ve probably received a fax, e-mail or phone call about obtaining a “merchant cash advance”. Merchant cash advances are a form of business funding that should, in theory, fall between a loan and an investment. Because it’s not a loan, there is no “interest” associated with it. Instead there is a fixed payback. The fixed payback is often determined by a “factor rate”, which can be deceiving because A/R factoring is not involved. What follows below is a quick explanation of this funding mechanism and how merchant cash advance rates are calculated.


What is a Merchant Cash Advance?

A merchant cash advance is an advance of future business revenues. The funding company will purchase a fixed amount of your future revenues, for lump sum cash up front. A sample deal would be a purchase of the next $13,000 of your revenues in the future, in exchange for $10,000 right now. The funding amounts are largely based on cash flow, like total monthly credit card transaction volume or business bank deposits. Payback would be a fixed % of all future moneys that come in – explained in more detail below. Learn more about the merchant cash advance, also known as cash flow funding.

Merchant Cash Advance Rates

In the above example, the merchant cash advance fees would be 30%. The total repayment on $10,000 would be $13,000. This would be a “factor rate” of 1.30. To calculate the total payback on the funding amount of $10,000, multiply the funded amount by the factor rate ($10,000 x 1.30) to obtain the payback. The payback is often called the purchased amount.

Many people tend to annualize the fee as an APR but this is incorrect. First, it is not a loan so calculating an interest rate is inherently faulty. Secondly, because the funding company is only receiving a fixed percentage of all future moneys as repayment on the advance, the length of time they will collect is often unknown. For example, if the funding company says “I will pay you $10,000 right now, in exchange for the next $13,000, and you will pay me back 10% of every credit card swipe, until I get my $13,000, no matter how long it takes”.

If tomorrow you have a huge downturn in business and your daily credit card volume drops from $1,000 to $100, the funding company will be taking 10% of $100, not $1,000. Similarly, if your business started to boom and you started to process $2,000 per day in credit cards, the funding company would receive $200 per day. Again, the length of repayment is unknown, so it’s not correct to calculate an APR based on merchant cash advance rates. The reason why is that you don’t know how long it will take to pay off.

Merchant Cash Advance Rates: Cheat Sheet

Moving forward, keep these things in mind if you’re shopping for a merchant cash advance:

  • The payback is called the “factor” rate, which is fixed.
  • The funded amount is the “advanced” amount.
  • The repayment amount is the “purchased” amount
  • Repayment is done by remitting a portion of every sale until the purchased amount is met.
  • The portion of every sale paid back will be either 1) a fixed percentage of your daily credit card revenues, or 2) a fixed dollar amount debited directly out of your bank account.

Look for Hidden Fees

Fees increase the overall merchant cash advance rates the factor rate sticker price. Look for an Addendum or Appendix to the agreement that detail the fees. These are usually buried in the back of the contract. Ask your broker representative or the direct funder what you will be charged for and don’t move forward until you have a clear idea of what the fees are. If you’re working with a broker, look for a fee that says “PFS” or “Professional Services Fee”. This is basically a finders fee and is usually placed on top of the commission the funder is paying the broker. Push back on the fees, they’re often times egregious – especially if your funder is located on Pearl Street or in New Jersey!

What is an Invoice?

what is an invoiceEditor’s note: this article is for new business owners and tailored to those who are starting to earn revenue from clients. This article is very elementary and does not apply to many business owners! But if you’re just ramping up your business and a client says to you, “invoice me”, it’s probably best to act like you know what you’re talking about and agree that you will. But it begs to question if you’re unfamiliar, what is an invoice?


What is an Invoice?

An invoice is basically a “bill” you send a customer after you’ve provided them with goods or services. Quickbooks defines it as “a bill for an account between a buyer and a seller indicating what was sold, and how much is owed”, and claims the invoice system is 5,000 years old. Investopedia defines an invoice as “a commercial document that itemizes a transaction between a buyer and a seller. If goods or services were purchased on credit, the invoice usually specifies the terms of the deal, and provide information on the available methods of payment.”

Put more simply, an invoice is the bill you send your customers, requesting that they pay you within a fixed time period, who don’t pay you cash upon the delivery or when you finish your work. An invoice includes information about the service or product delivered, with the due date, preferred or accepted methods of payment, and any special terms regarding payment or discounts.


How do I invoice a client?

There are many free services online that allow you to invoice a client with a basic invoice template. Ideally, you should keep invoices very simple so they are easy to understand and identify how much is owed and for what. Having an invoice system in place too is very important. This will require that you label invoices consecutively, i.e. Invoice 001, 002, 003, 004. Invoice numbers should be independent of the customer – meaning you can send multiple invoices to a single customer. Keeping track of invoice is extremely important for a few reasons. First is that it will keep you organized. Secondly, you want to have the ability to track invoices and to whom they were sent in the future (especially when closing out the books at year end).


Other Words for “Invoice”

Invoices are also known as “accounts receivable”, “A/R”, or simply a “bill”. Once an invoice is issued to your client, you need to increase the Accounts Receivable account in your accounting system with a simple accounts receivable journal entry. And whatever you do… don’t forget to invoice your clients!

Factoring Invoices: Pros and Cons of A/R Based Funding

factoring invoicesMany people who start a business generally are aware of the fact that there are three main ways to raise capital. The first is so obtain money from an investor. The second is to obtain money from a bank (i.e. a loan), and the third is to do it themselves by investing their own money. However depending on the type of business you have, particularly what kind of customers you have and how you bill them, factoring invoices may be the best suited option.

What is Invoice Funding?

Invoices, also known as accounts receivable, are created when a business bills its customer and says “pay me later”. Invoice factoring is when a business sells those unpaid invoices to a factoring company in exchange for up front capital. Invoices are sold at a discount and usually the business obtains 80% of the value. After the business’s customer pays the factoring company the value of the invoice, the 20% rebate is given to the client, less the factor fee.


The Benefits of Factoring Invoices

The benefits of factoring invoices are many, and usually far outweigh the costs. Here are the main benefits:

1. Match the timing of income and expenses.

Despite a common misperception that invoice factoring signals a company is in trouble, in most cases it’s actually quite the opposite. Rapidly growing businesses need capital to continue to take on new business. Therefore financing invoices is a great way to match income and expenses, so a business has the readily available capital it needs to take on a new job.

2. Bridge to your busy season.

Many businesses are cyclical and have higher revenue during their busy season. To ramp up for busy season, a business will need capital on hand. Invoice factoring is a a viable solution to closing short-term cash flow gaps.

3. Cheaper than selling equity.

Factoring invoices is a cheaper way to raise money than selling shares of your company to an investor. If you sell shares, you forever give up a percentage of future profits to the investor. If you plan to be in business for a while, that could become very costly as you grow to higher revenue levels. At 1-3% per month, factoring is way cheaper.

4. Safer than a loan.

A true factoring product is what’s known as “non-recourse factoring“, meaning the factoring company takes the risk that your customer’s don’t pay. These deals should never have a personal guarantee involved. This differs from a bank loan, that has liability attached to it if your client’s don’t pay, often times with a personal guarantee.

5. Fast time to funding.

The typical turn around time from your first conversation with a factor until you receive funds is 3-5 days, far faster than a bank.


The Cons of Factoring Invoices

Despite the many benefits of invoice financing, there are some negative aspects associated with it.

1. More expensive than a loan.

Factoring companies assume the risk that your customer don’t pay. Because of this increased risk, the price of factoring invoices is higher. You have to ask yourself how much risk you want to take. If you really want the cheapest financing deal out there, you need to be very confident in your customers paying and ok with taking that risk that you will be held liable if they don’t. In that case, look into invoice financing. However, if you absolutely do not want to take that risk, invoice factoring is for you.

2. It could impair your ability to obtain a bank loan.

Factoring companies will take a “security interest” in the assets of your business. At the very least, they’ll take a security interest in the current and future receivables of your business. Therefore it’s important to have the discussion with your factor, to ask if they will “subordinate” if they obtain a pre-approval for bank debt. Most factors will, however you don’t want to get set-up with a factoring facility to satisfy a short term capital need, at the cost of a better long-term solution.


We’re Here To Help You

In order to make the best decision for your business, you must thoroughly weigh the pros and cons before proceeding with such an important decision. Contact us today for a free assessment of your financing needs and business strategies to see if factoring invoices is a good fit for you and your business.