Best Invoice Factoring for New Businesses

Invoice factoring is one of the few kinds of financing that fit a new business, because approval depends mostly on the strength of your customers, not on your years in business or your credit. If you have a few customers and one big invoice to collect, spot factoring is usually the most practical; if you bill reliable customers every month, recourse factoring usually costs less; and if you'd rather not sell your invoices and you have steady sales hitting your account, we recommend looking at working capital from Merchant Fund Express.

Below you'll find the ranking, a comparison table, how the process works for a business only a few months old and the questions that prevent contract surprises.

How we picked

We applied the method in how we rank business funding options: speed, minimum time in business, minimum credit, ITIN acceptance, documents, amounts and collateral. No grades or scores.

For factoring for new businesses, we also looked at:

• Whether they accept businesses with only a few months and a few customers.
• Whether you must factor all your invoices or can choose which ones.
• Whether there are monthly minimums or fixed-term contracts a young business may not be able to meet.
• Who carries the risk if your customer doesn't pay.

If this is your first look at the product, start with our guide to invoice factoring for startups, which walks through how it works step by step.

The best factoring options for new businesses

1. Merchant Fund Express (recommended funder). It's not factoring: it's working capital based on your sales and deposits, not just your credit. We list it first because many new businesses looking at factoring really need cash to operate, and would rather not assign their invoices or have a factoring company contact their customers. It offers $5,000 to $5,000,000, considers applications from FICO 500, often decides in 2 to 4 hours and doesn't require collateral in most cases. You need a few months of deposits in the business account. It offers Spanish-speaking support and accepts applicants with an ITIN (no SSN needed).
2. Spot factoring (single-invoice factoring). You sell just one invoice or a few, when you need to, with no volume contract. For a new business with one large customer that pays in 60 days, it's the most flexible route. The cost per invoice is usually higher than under a volume contract.
3. Recourse factoring. If your customer doesn't pay, you're on the hook to the factoring company: you return the advance or swap in another invoice. Because you carry the risk, it usually costs less. It fits if your customers are established companies that pay well.
4. Non-recourse factoring. The factoring company takes on part of the risk if your customer doesn't pay due to insolvency, as defined in the contract. It costs more and is usually stricter about your customers' quality. Compare both in recourse vs. non-recourse factoring.
5. Invoice financing. Instead of selling the invoice, you use it as collateral for a loan or line. You keep collecting from your customer, who usually never knows. It typically requires more history than factoring, so it can be hard for very new businesses.

Comparison table

How it works for a business only a few months old

1. You deliver the work and issue the invoice to your customer, which must be another business or a government entity.
2. The factoring company reviews your customer: its payment history and financial strength. It also checks that the work was delivered and the invoice is valid.
3. It advances you most of the invoice value, usually within days.
4. Your customer pays the factoring company on the due date, into an account they specify.
5. You receive the rest, minus the factoring fee.

What you'll be asked for: the invoice, proof of delivery (purchase order, contract, signed receipt), your customer's details, your business documents and sometimes a check that there are no other liens on your receivables. Your business doesn't need years behind it, but your invoices need to be clean and your customers reliable.

For the technical pieces of the process, read how invoice factoring works and when it makes sense.

Which fits your situation

• New contractor with one big contract paid in 60 days: spot factoring for that invoice, without locking into volume.
• Commercial cleaning or trucking company billing the same customers every month: recourse factoring with a flexible contract.
• Supplier to a single large company: be careful about depending on one customer; non-recourse factoring can give peace of mind, if the factor accepts it.
• You sell over the counter or to consumers: factoring doesn't apply. Look for working capital based on your sales.
• Your business has a few months of steady deposits and you don't want customers to know: working capital or invoice financing.
• You have an ITIN: many factoring companies focus more on your customers than your ID, but each has its own policy, so ask first. For questions about your immigration situation, talk to an immigration attorney about your situation.

Common factoring mistakes new businesses make

• Invoicing before delivering. Most factoring companies only buy invoices for completed, accepted work. An invoice billed in advance or with open disputes is usually rejected.
• Depending on a single customer. If almost all your billing is with one company and that company pays late, your cash flow stops even with factoring. Diversify little by little.
• Signing a long contract in your first month. A new business doesn't yet know how much it will bill. Start with spot factoring or a contract with no minimums, and negotiate better terms once you have history.
• Not telling your customers. If your customer is surprised by a letter from a company it doesn't know, it may delay payment. Explain ahead of time, simply, how collection will work.
• Using factoring to cover thin margins. If your work barely turns a profit, the factoring fee can eat it. Review your pricing before financing each invoice.
• Forgetting about liens. If you've already signed other financing secured by your receivables, the factoring company may turn you down or ask you to resolve it first. Review your current contracts.

For companies and criteria more broadly, also see the best invoice factoring companies.

Questions to ask before signing a factoring contract

1. What percentage of the invoice do you advance, and when do I receive the rest?
2. How is the fee calculated: flat, per period of days or a combination?
3. Are there extra fees for setup, transfers, customer credit checks or closing?
4. Do I have to factor all my invoices, or can I choose?
5. Is there a monthly minimum? What happens if I don't meet it?
6. How long is the contract, and how do I cancel?
7. Is it recourse or non-recourse? If non-recourse, exactly which cases does it cover?
8. How do you contact my customers, and in what tone?

A new business should avoid long contracts with high minimums: if you bill less one month, you end up paying volume fees for capacity you didn't use. Compare at least two proposals. If in the end you'd rather not sell your invoices, apply with Merchant Fund Express: it's free and doesn't affect your credit. Leer en español.