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What Is Invoice Factoring and How Does It Work?

Invoice factoring is an alternative financing option that gives small business owners fast access to cash and eliminates the need to chase invoices.

Small business owner packing up a box to ship to a client.

According to the U.S. Bureau of Labor Statistics, nearly 50% of all small businesses will fail within five years of launching—one of the reasons that small businesses fold is poor liquidity. Invoice factoring is a financial tool that small business owners can use to fill the gap when invoices go unpaid or clients take too long to pay. 

By partnering with a company that offers invoice factoring, SMBs can tackle two pain points in one go: someone else is responsible for collections, and they get paid from clients much faster. 

Invoice Factoring in a Nutshell: Get Paid Faster

If you invoice clients for products or services, invoice factoring could be a good fit for your business. Alternative financing firms like Nexi allow you to sell unpaid invoices in exchange for a “factoring fee.” These firms take over the collections process and pay you as much as 90% of the invoice value upfront.

Invoice factoring is not a loan and isn’t subject to the same constraints as small business lending. 

When you apply to factor your invoices, the financing firm looks at the creditworthiness of your clients, not your business. You don’t put up collateral. If your business is a good candidate, you’ll likely receive your money within hours or days of approval. 

The process usually happens in four steps:

  1. You sell unpaid invoices to a factoring firm like Nexi.
  2. The firm pays the majority of the invoiced total right away.
  3. Your clients (who received the invoice originally) pay the factoring firm directly.
  4. Once the factoring firm receives the full amount from the client, they pay you the remainder, minus a factoring fee. 

Invoice factoring frees you up to focus on generating new income instead of worrying about work you’ve already finished. 

The Benefits of Invoice Factoring for Small Business Owners    

Invoice factoring helps you gain control over your cash flow. You can choose which invoices you want to factor, and you don’t have to go through the rigamarole of applying for a small business loan. Although invoice factoring is considered a form of small-to-medium (SMB) business financing, the reality is that it’s your money. 

1. Get Your Money Faster.

The timeline for paying an invoice can be as long as 90 days. Sometimes, you can set a shorter deadline but can’t force a client to pay, especially if you’ve already delivered the product or service. Invoice factoring puts the money in your account once your application is approved.

2. Use the Money Where You Need It, With No Stipulations.

With traditional SMB financing, you must declare how you intend to use the money. Some lenders limit how you can use the money you receive from their lending programs. Invoice factoring allows you to spend those funds in the way that’s best for your business, including payroll, equipment, improvements, or any other business expense. 

3. Eliminate the Headache of Chasing Clients for Money.

In a perfect world, every client pays as soon as they receive their invoice. In the real world, you could wait months. Sometimes they forget to pay it. Other times they actively avoid paying you. Either way, babysitting clients is exhausting and steals your focus from more important matters. When you factor your invoices, you’re paying somebody else to do that job. 

4. Fuel Business Growth

As a small-to-medium business owner, you may not have the luxury of investors with deep pockets. Every dollar has a job to do. This creates a challenge when opportunities pop up that require additional capital. You need to respond quickly. Invoice factoring can give you a fast capital injection when you need it most. 

Applying for Invoice Factoring With Nexi Is Simple and Fast

There are just two qualification criteria when you apply with Nexi:

  1. Your business must be older than six months. 
  2. Your business must generate $100,000 or more in annual revenue. 

To process your application quickly, you’ll need provide a few pieces of information:

  1. Standard details for you (as the business owner or responsible party) and your small business, such as name, location, contact information, business age, and annual revenue.
  2. Basic details about the invoices you want to factor.
  3. An authorized connection with your bank or your business’s three most recent bank statements.
  4. An authorized connection to your business accounting software.

Once we have all those details, we can process your application and provide an approval decision within 24 hours. 

If approved, you could receive up to $1,000,000 with a factor rate as low as 1.25%. And the funds should be deposited to your bank account within 24 hours. 

You can learn more on our invoice factoring page. You don’t need good credit to apply, and you aren’t required to accept the offer if approved. With invoice factoring, the likelihood of approval is much higher than it is for conventional funding such as SMB lending.

Frequently Asked Questions About Invoice Factoring

Now that we have covered the invoice factoring basics, let’s take a look at some of the most commonly asked questions that come our way from small business owners. Don’t see your question? Reach out to us at and we will answer any remaining questions you may have!

1. What Is the Difference Between Invoice Factoring and a Traditional Loan From a Bank?

A traditional small business loan from a bank requires a rigorous application process that includes a credit check, putting up collateral, strict repayment terms, and limitations on how the funds can be spent. A loan is classified as debt and is subject to all the accounting and tax rules around debt. 

When you factor invoices, your clients’ creditworthiness is examined, not yours. You don’t need collateral, and nobody can tell you how to spend the money. Invoice factoring is not classified as debt and doesn’t affect your credit score or debt load.  

Lenders base the “cost” of a traditional loan on the annual percentage rate (APR). The cost of invoice factoring is called a factoring fee, usually expressed as a one-time percentage of the total invoice, but it may include other variables as well. 

2. How Does Invoice Factoring Impact My Relationship With My Customers?

When you work with Nexi, you hire a professional firm to take over invoice collection. Your relationship with your clients is unchanged, except that you no longer have to pester them for money when the bill is due.

Invoice collection should not be confused with debt collection. Nexi is not a debt collection agency. If your clients are late with payments, we follow a clear and professional process to remind them and collect payment. 

3. Will My Customers Know That I Am Using Invoice Factoring?

We communicate clearly and transparently with you and your clients throughout the transaction. 

Major corporations such as Amazon factor their invoices. The concept should be familiar to most established vendors. If not, we’ll be happy to provide a clear explanation. The cost to your client stays the same. They just send the money to Nexi instead of paying your business directly. 

4. How Is the Factoring Fee Calculated, and Is It Negotiable?

Unlike traditional SMB financing from banks or other lenders, the factoring fee is not connected to the volatility of the Fed’s interest rate policy. 

The base factoring fee for most firms is usually calculated via the following criteria:

  • The total value of the invoices you intend to factor (the higher the number, the cheaper it is to factor).
  • The creditworthiness of your clients.
  • The timeliness of their payments.

Some companies offer different services or terms that will affect the final factoring fee that you pay. These terms may be negotiable. Be sure to ask for a detailed breakdown of the factoring fee so that you can decide on terms that fit your needs. 

5. Are There Any Restrictions on the Funds I Receive From Invoice Factoring?

No. Total spending flexibility is a significant advantage of invoice factoring compared to conventional SMB financing. 

6. How Long Does the Approval Process for Invoice Factoring Take?

Once you’ve completed the quick, three-step online application, we can usually make an approval decision within 24 hours. Funding usually follows within 24 hours of the approval decision. 

7. Can I Factor All My Outstanding Invoices, or Do I Have the Flexibility to Choose Which Ones to Factor?

You control which invoices you choose to include in the factoring transaction. Some businesses prefer to factor all of their invoices to keep things simple, but that decision is up to you. Any invoice that you don’t factor is an invoice that you’ll have to monitor and ensure timely payment from the client. 

8. Does Invoice Factoring Affect My Credit Score or Require a Personal Guarantee?

Invoice factoring is not a form of credit or debt. Nexi doesn’t use your credit score to make approval decisions, and the total amount of invoices you factor doesn’t affect your debt load. 

In the majority of situations, no guarantee of payment is required. Unusual circumstances may require additional terms prior to approval and funding.  

9. What Happens if My Customers Are Late in Making Payments?

Although rare with large and established vendors, sometimes clients pay invoices late. At Nexi, we follow a discreet, professional protocol to follow up with late invoices and ensure prompt payment. 

Ultimately, once you factor an invoice with Nexi, the timing of the client’s payment is our problem, not yours. That’s the beauty of our invoice factoring service.  

10. What’s the Difference Between Invoice Factoring and Invoice Financing?

Although they sound similar, invoice factoring and invoice financing are not the same thing. 

Invoice factoring: You sell your invoices to a firm like Nexi which takes on the responsibility of collecting payment. You get most of your money right away, and it isn’t classified as debt.

Invoice financing: You borrow against the value of your outstanding invoices. You’re still on the hook to make sure your clients pay you, and once they do, you’ll have to pay that money back to the lender. Invoice financing follows similar rules as other forms of borrowing, including credit checks and reporting requirements.  

Invoice Factoring Is Just One of the SMB Financing Tools Available to You

At Nexi, we provide small business owners with the flexibility they need to run and grow a successful business. In addition to invoice factoring, we’ll also offer other forms of alternative financing:

Merchant Cash Advances (MCA): This is a great option if you have lots of sales volume but can’t secure the conventional financing your business needs. An MCA gives you fast access to cash, and your repayment is deducted automatically from future sales. 

Small Business Lines of Credit (LOC): With a LOC, you gain peace of mind knowing that when you need extra money, it’s available to you. Best of all, you only pay interest on the amount you use. 

Choose The Best Financing Options for Your Small Business

We know that conventional lending options come with lots of hurdles and constraints. Your small business doesn’t need any more roadblocks when it comes to accessing funding. That’s why our three-step application process is designed to be as fast and straightforward as possible. 

Invoice factoring can be an excellent way to quickly unlock funds and eliminate the headache of babysitting unpaid invoices. 

While invoice factoring isn’t the right choice for every business, it could be just the solution you’re looking for. When you’re ready to learn more about invoice factoring for your business, call us at 888-364-2070, or submit an application

There’s no obligation, and our knowledgeable staff will help you find an alternative financing solution that meets your needs.

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