No doubt one of the most important ways bookkeepers and accountants help their small business clients is by managing cash flow – an ongoing focus that comes with a set of challenges unique to small, growing companies, which include:

• Lack of funding options. Small businesses who are too new to have a long financial track record and documentation to back it up often can’t qualify for conventional loans and lines of credit through banks. In fact, 52% did not feel supported by their banks.
• Debt accrued from the pandemic. Many business owners have had to make difficult financial decisions during the COVID-19 pandemic, taking on extra debt to get through lockdowns. 40% of Canadian businesses said that they could not take on any more debt.
• Time for funding options. The process from application to decision for bank financing takes three to six months. (Don’t forget to factor in time to prepare and gather the documentation needed!)
• Long payment terms. B2B buyers typically expect payment terms of 30, 60, 90 days, or more.

Shortening payment terms in particular would ease many of the issues above because the need for funding in the first place would be reduced. Not only would doing so reduce stress for your client (and possibly for you, too!), but having that cash faster would help them grow their business. By getting paid quickly, they can more readily take on more customers and larger contracts because they have the cash to pay upfront costs of materials and labour.

It’s also worth noting that when you help your clients meet their financial obligations and grow their businesses, that success rubs off on your practice. When your clients grow, so does your relationship with them as a trusted financial partner. That leads to positive online reviews and word of mouth referrals that help you get more high-quality clients.

Covering those facts builds up to why we’re talking about invoice funding – a way to speed up your small B2B business clients’ cash flow without debt, equity, or dealing with banks. From talking to financial professionals, we’ve found out a lot of them might have heard the term invoice funding, but aren’t sure what it is – and what it isn’t.

The Definition of Invoice Funding

Invoice funding is an alternative financing method where a business owner sells invoices to a factoring company. The business owner receives cash for the invoice amount, less a fee, ahead of the payment terms. The business owner’s customer pays the invoice amount to the factoring company according to the original payment terms.

This simple definition doesn’t tell the whole story about factoring. To understand invoice factoring and why many businesses use it, it’s helpful to understand what it is not. There are a lot of misconceptions about factoring that have given it a bad reputation with small business owners and financial professionals alike.

It’s not a loan; business owners don’t have to worry about paying the money back because their customer pays the factoring company.

Most importantly, choosing to factor invoices doesn’t mean a business is struggling or can’t reliably serve its customers. (The truth is often quite the opposite because many businesses turn to invoice funding to take advantage of growth opportunities). Add to this the perception that many traditional factoring companies charge hidden fees, don’t fund the full invoice amount, and take weeks to pay, and you can see why it’s left a bad impression on some people.

Because of these perceptions, bookkeepers and accountants often have questions about invoice funding.

Invoice Factoring FAQs

How is invoice funding used?

Small businesses use invoice funding for a variety of purposes, including:

• Making payroll
• Buying new equipment
• Paying their own suppliers
• Hiring staff
• Fulfilling large orders or projects

Rather than treating it as last resort financing, many small businesses fund invoices because they don’t have the time or years of financial documentation necessary to qualify for traditional financing. Others that do qualify, like the idea of not being tied up in a long-term loan.

What if my client doesn’t have a cash flow problem?

Many small businesses have enough cash to run their businesses, but find that they need extra cash to grow. They often fund invoices so they can bid on large contracts or take on more work. Others get set up with a factoring company to have back-up financing available.

How do factoring companies work with my clients’ customers?

Small business owners are understandably concerned about how a factoring company might work with their customers. They’ve worked hard for these relationships and don’t want them damaged. Many factoring companies make it simple and easy to redirect payments, only communicate with your client customers when necessary, and talk to the client first if they need to make contact.

How does invoice funding work?

Every factoring company, business, and their customers are different, so these steps are generalized accordingly. This is more or less what your client can expect when they factor an invoice.

• Business owner submits invoices for funding. Traditional invoice factoring companies often require a business to factor all their invoices for the duration of a contract. With many newer companies, your client can choose which invoices they want to fund.
• Factoring company does due diligence. Oftentimes this will include checking that a business is legally established, is up-to-date on taxes, and doesn’t have liens on their accounts receivable and/or the specific invoice. During this step, the factoring company will also verify that the invoice is real.
• The business owner’s customer is asked to sign an NOA. Having the customer owing the invoice sign a Notice of Assignment means they understand that the factoring company now owns the invoice, so they need to redirect payment. While a lot of business owners get concerned about their customers being involved, many large companies especially are used to this process.
• The business owner gets funded. The business owner receives cash in their bank account, less a fee.
• The customer pays the factoring company according to the invoice terms. When the invoice is due, the customer pays the factoring company, and the process is complete.

Speeding up cash flow can have a huge impact on your small business clients’ success; invoice funding is simply one way to do that. By having a working knowledge of this alternative financing method, you’ll be able to offer your clients additional funding options to build their business, grow their trust, and help your practice thrive.

Curious About Becoming a FundThrough Financial Professional Partner?

You’ll get a flat bonus, or a discount you can pass on to your client, if you refer any clients who decide to fund an invoice. If you have clients whom you would recommend invoice funding to anyway, this is FundThrough’s way of thanking you. Learn more and sign up.

About FundThrough

FundThrough is a leading fintech company accelerating cash flow and enabling growth for small and medium businesses. Based in Toronto, FundThrough’s AI-powered invoice funding platform gives B2B businesses fast, customized funding offers to get their invoices paid in a few days–rather than a few months–and get quick access to cash that’s already theirs. For more information, go to http://www.fundthrough.com. To learn about FundThrough’s partnership with Intuit QuickBooks and how you can fund an invoice, click here.