FreightWaves Ratings cuts through the noise of freight technology product reviews to make you a smarter buyer

Is Invoice Factoring Possible With Bad Credit?

Invoice factoring lets businesses collect proceeds from their invoices without delay. Although companies use factoring to raise extra funds, some wonder if invoice factoring is possible with bad credit. Want to learn how invoice factoring can help your business? We gathered the details in this article.

How Does Invoice Factoring Work?

Many companies struggle to collect payments on their invoices. Factoring invoices helps companies receive immediate payments on their invoices. 

An invoice factoring company will pay money for your invoice. They will collect invoice payments from your clients, and you will have access to extra funds.

Does Your Credit Score Matter for Invoice Factoring?

Your credit score does not determine if you qualify for invoice factoring. Low-credit businesses often reach out to an invoice factoring company for more attractive funds.

Instead of looking at your credit score, invoice factoring companies look at your accounts receivable. They use this data to determine what to offer for your invoice. 

Will Invoice Factoring Companies Do a Credit Check?

An invoice factoring company will still conduct a credit check. The credit check helps invoice factoring companies assess their risk. Companies will use your credit score to determine how much risk they wish to incur in your business.

Will Invoice Factoring Affect Your Credit?

Invoice factoring will not affect your credit. This process does not increase your debt. Instead, you receive immediate cash flow from your invoice instead of waiting until the end of the invoice’s term. You also don’t have to chase clients who don’t pay their invoices promptly.

How Do You Qualify For Invoice Factoring?

Before factoring invoices, companies will check if your business qualifies for invoice factoring. Make sure have these qualifications before approaching an invoice factoring company:

  • You operate a business
  • You have commercial or government clients
  • Your clients have good credit
  • No open bankruptcy
  • Profit margin qualifications vary (aim for 10%-15% profit margin)
  • No liens or encumbrances on your invoices
  • You must provide basic company information
  • An established payment plan for any tax problems or tax liens
  • Credible background

What Determines the Factoring Fee?

Invoice factoring companies charge a factoring fee. This fee is the company’s profit from factoring your invoice. Companies will assess the creditworthiness of your business and the invoiced client. 

Additionally, invoice factoring companies will consider the average days outstanding in receivables. If the invoice factoring company feels confident in receiving the full invoice over time, they will charge a lower factoring fee.  

Example of Invoice Factoring

Let’s say you issued a $10,000 invoice to one of your clients. This client will pay the invoice within six months. However, you need the money now to buy new equipment. Your credit is low, and banks won’t give you a loan. 

You can’t ask the client to pay the invoice immediately. However, you can turn to an invoice factoring company. An invoice company will give you upfront money in exchange for the invoice payments. 

Suppose an invoice factoring company gives you $9,300 for your $10,000 invoice. You immediately receive the $9,300 and can use that money to fund new equipment. You missed out on an extra $700, but you needed the money. In this example, invoice factoring was right for the business. The invoice factoring company collects invoices from your client. If they collect all of the proceeds, they end up with $10,000. Those proceeds represent a 7.53% gain from the company’s $9,300.

Factors To Consider When Invoice Factoring With Bad Credit

Some businesses can benefit from invoice factoring. It gives them access to proceeds even if they have bad credit. However, invoice factoring is not perfect. Consider these factors before raising funds with invoice factoring.

Credit

Invoice factoring companies will review your clients’ credit scores before factoring in an invoice. Low credit scores will affect your ability to qualify and increase factoring fees.

Customer Reliability

Companies will look at your accounts receivable to measure customer reliability. They want to ensure a client can pay the invoice. They will look at your invoice payment history to see if your clients pay up. Any questionable reliability will increase invoice factoring fees.

Invoice Payments 

If you have a working relationship with the client, invoice factoring companies will analyze it. They want to see if your client reliably pays the invoice on time. A late-paying client will increase the invoice factoring company’s risk. This increased risk will result in higher fees. 

You may want to choose a recourse contract for factoring invoices. These contracts let you buy back unpaid invoices to reduce risk.

Cost

Invoice factoring can get expensive. Many invoice factoring companies charge between 1%-5% of the total invoice amount in service fees. These fees will bite into your profits, but you get immediate access to proceeds.

Advantages of Invoice Factoring

Many companies use invoice factoring to raise cash quickly. They do not have to turn to traditional banks for funds. These banks will charge higher interest rates for low-credit businesses. Some low-credit companies may not qualify for a bank loan. 

You also part ways with client outreach. Since you sold the invoice, you don’t have to haggle with clients about paying on time.

Disadvantages of Invoice Factoring

Invoice factoring companies will take a fee from your invoice. Even though you gain money in the short term, you lose money over the long term. Invoice factoring companies have longer time windows to collect proceeds.

An invoice factoring company can ruin the relationship between you and a client. If the company is overbearing about collecting payments, your client may do business elsewhere. Make sure you select an invoice factoring company that will not pressure your clients or make them feel uncomfortable.

Invoice Factoring vs Invoice Financing 

During invoice factoring, a company sells its invoice to an invoice factoring company. You no longer own the invoice, but you receive quick cash.

During invoice financing, you borrow money against your unpaid invoice. You are still responsible for collecting payments and reaching out to clients. You will pay interest and fees for invoice factoring.

Expand Your Business with Invoice Factoring

Invoice factoring helps companies fund essential purchases. They can’t get a traditional loan due to low credit, so they look towards factoring invoices. Invoice factoring allows companies to acquire necessary equipment and assets to maintain operations and cultivate expansion. 

TAFS will factor your invoices and provide your business with much-needed funds. As one of the industry leaders, TAFS goal is to help trucking companies lower operating costs and increase cash flow. Get a free quote from TAFS today! 

TAFS is More than Freight Factoring

As one of the industry leaders, TAFS assists trucking companies to increase cash flow with some of the lowest factoring rates in the industry and 1-Hour Advance option.

TAFS is More than Freight Factoring

As one of the industry leaders, TAFS assists trucking companies to increase cash flow with some of the lowest factoring rates in the industry and 1-Hour Advance option.