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Small Business Invoice Factoring: What You Need to Know 

October 5, 2023
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Small business invoice factoring is a financing option that provides businesses with immediate access to cash. Many companies find it to be favorable compared to traditional business financing methods like bank loans and lines of credit. 

On the latest episode of our “Net 30” podcast, host Chris Elmore, AvidXchange’s chief evangelist, discussed small business invoice factoring and other funding options with Rebecca Hughes, vice president of product, and Jon Reed, senior manager of supplier growth. 

Read on for a summary of their conversation. To listen to the full podcast, click the player below or download it on your favorite podcast platform, including Spotify, Apple, iHeart and  Pandora.    

Small Business Financing Challenges

Elmore began the discussion by likening money to oxygen for small businesses. A lack of capital and poorly managed cash flow are two of the main reasons why small businesses fail.  

In many cases, small businesses turn to traditional financing methods for cash. While a traditional approach has some benefits like predictability, it also involves drawbacks.  

Applying for funding is a lengthy and selective process. The vast majority of small businesses that apply for loans are denied, and the time between submitting a loan application and that loan funding is quite long.  

“Time is money. If you’re waiting around on your money, you can’t work to make more money. So, it’s not always the best path to go with the traditional loan route.”

Small businesses don’t typically meet the criteria of most traditional lenders by nature because they don’t usually have a robust credit history or high-value collateral. That makes them a “risky” investment, so lenders that do extend financing will often require high interest rates and less-than-favorable terms.  

“Even if it’s a rock-solid business … that’s not enough for those lending facilities … In the rare occasions that [small businesses] do get approved, they’re not getting approved for very much. It’s hard to get that leg up, and then the rates are ridiculous.”

What Is Small Business Invoice Factoring?

Small business invoice factoring is a financial transaction in which a small business “sells” its unpaid invoices to a factor at a discounted rate or for a small fee. Small businesses get cash immediately instead of waiting for their customer to pay later.  

For example, a small business may factor a $5,000 invoice with Net 45 terms and receive $4,800 ($5,000 – 4% factoring fee) the next day rather than waiting 45 days to be paid the full $5,000. The factor then collects payment on the full invoice amount.  

Hughes explained that small business invoice factoring is based on the concept of asset-based lending. “When we step back, the concept underneath factoring is the equivalent of ‘I’d like you to give me something in exchange for some kind of collateral or asset I have.’ This has been around for ages. This is bartering,” she said. 

Small business invoice factoring is a good solution if your business needs cash quickly to address a pressing need or emergency.  

“Surprises can happen for small businesses. They’re small, so they’re exciting and dynamic, but they’re also fragile. And so, the unknowns can happen. And when those unknowns happen, it’s great to have backup plans.”

Reed shared a story of an organization operating a fleet of snowplows. The company was able to accelerate an invoice with AvidXchange to get funds immediately, which they used to purchase a new snowplow to complete a job the following day.  

Hughes added that some companies choose small business invoice factoring to fund day-to-day operations and growth opportunities. “If someone said, I’m going to charge you 4% but you can use the capital that you’re borrowing to go get this customer that’s going to 40% grow your business, would you do it?” 

Hughes is a proponent of small business invoice factoring compared to traditional lending alternatives because it allows companies to extend their capital by borrowing against their business to fuel growth. She explained, “Betting on collateral that you know is owed to you is safer than borrowing openly against nothing. It’s your money. It was owed to you.” 

How Does Invoice Factoring Work with AvidXchange’s Payment Accelerator?

Hughes shared that working with invoice factoring companies is “super painful,” involving lots of paperwork, credit checks and back-and-forth interactions with the factor.  On the other hand, AvidXchange offers members of its supplier network a “super modern enrollment experience” with its Payment Accelerator solution.  

“They don’t have to talk to anyone. They can go ahead and they can just get right into the application. They can fill it out with just a couple of clicks,” said Hughes. “It’s very efficient for them to provide key details and information. And we’re immediately processing it against our network data in real time, which is fantastic.”  

With Payment Accelerator, suppliers can choose to accelerate all their payments or just select invoices. AvidXchange has a dedicated Supplier Care Team available via chat or phone to assist suppliers with the payment process. 

Reed called Payment Accelerator “seamless,” allowing suppliers to essentially manage small business invoice factoring themselves through the technology without changing processes or notifying their customers. 

“[Suppliers] have transactions that are flowing through our network. What’s happening is they’re borrowing against invoices that we have. And when the payment comes through, we’re automatically able to conveniently capture, reconcile and settle that transaction … Their customers didn’t have to change anything about the way they were working, and the supplier didn’t have to change anything about the way they were working. And they were able to borrow money very, very quickly on their schedule.

To learn more about small business invoice factoring, listen to the full podcast episode on the player below or visit the AvidXchange Podcast Network on your favorite streaming platform.   


Please note: The “Net 30” podcast is designed for audio consumption. Transcripts are generated using speech recognition software and may contain errors. Please check the corresponding audio before quoting in print.


Hi, my name is Chris Elmore. I am AvidXchange’s Chief Evangelist and I’m the host of the Net30 podcast. On the Net 30 podcast, we meet with industry leaders to unpack problems and solutions and talk about innovations that are impacting financial professionals. The best part about this? We’re going to do it all within 30 minutes. So let’s get into it. Here we have in the room, Jon and Becky. Becky, starting with you. Okay. What should folks know about you?   


Hi everybody. I’m Becky Hughes, vice president of product. I focus on the supply side of our business dealing with and working together to deliver services for our supplier customers. I’ve been at AvidXchange for 14 years entire time on the accounts receivable side of our business. A pleasure to be here.  


Jon, 14 years?   


Not quite. I just celebrated my fifth year anniversary at AvidXchange. So thanks for having me. My name is Jon Reed. I run the invoice accelerator sales team – the factoring platform – but happy to be here and excited to be a guest with Chris.  


All right. So today we’re going to talk a little bit about. You know, some basic finance. We’re also going to talk about factoring. Now, by the way, when we got together for this thing – I thought factoring was a negative word, but we’re going to talk a little bit about companies just getting the money that’s owed to them.  

Our CEO, Mike, when he started this thing, he called cash oxygen. Oxygen. I just love that. Oxygen for the business. Businesses run out of business for one reason, is they run out of money. Yep. Let’s, let’s just kind of set the landscape. Jon, maybe you can help us with this. Yeah. Off the top of your head, what are some of the basic financing tools that small and medium-sized businesses utilize today?  


You have several different options that you can look at. Just depends on what’s right for your business. You have your small business loans that you can acquire at a bank. You have SBA loans that are government-funded financial services as well as business lines of credit is another option, and then finally a business credit card.  

And then of course the option we’re going to talk about as well, which is invoice factoring. But there are a lot of different pros and cons to each one of those. With a lot of the loans, everybody’s, well not everybody, but most everybody has done some sort of loan in their lifetime.  

It takes a lot of time to get a “yes” or “no” when it comes to if you’re going to get approved for it. So time is money. If you’re waiting around on your money, you can’t work to make more money. It’s not always the best path to go with the traditional loan amount. Other pros are you’re going from a bank. You have a certain payment that you pay back every month. Financial planning’s good there. You understand what you’re going to be receiving. So that’s a pro to some of those. 


There was some controversy before we started this podcast that we weren’t going to give statistics, 37 percent of small to medium sized businesses have applied for financing and out of the 37 percent, 80 percent of been rejected.   


When you think about the dynamic of small businesses, right? Fun, exciting, innovative. They lack some of the advantages of those more mature businesses. They don’t have a proven history, right?  

They may not have had the momentum to be able to build the outstanding receivables or the annual recurring revenue. They may not even be in a business sector where annual recurring revenue is a strong foundation. And so, when you think about some of the other, types of access to capital that Jon mentioned, right?  

They’re borrowing. And then sometimes they’re borrowing with no collateral or no opportunity to provide collateral underneath it. And those businesses that they’re borrowing from have to go and look through the history of either the owner or the business to be able to make those lending decisions.  

And because new businesses just inherently are new in the very nature of what they do in smaller businesses in particular, they won’t have that history. So they rarely get approved. And then when they do get approved, the interest rates are incredibly high because the lending provider is taking on what they perceive to be a large amount of risk – even if it’s a rock-solid business. Even if it’s a rock-solid business plan, business strategy, great owners.  

They’ve got customers. They’ve got every positive thing going for them. That’s not enough for those lending facilities to bet a competitive interest rate or reasonable borrowing amount of money on. And so sometimes they get approved in the rare occasions that they do get approved, they’re not getting approved for very much. It’s hard to get that leg up and then the rates are ridiculous.  


How do you choose the best method?  


It really depends on what’s right for you. I mean, if they are a new business, it’s going to be really hard to secure those funds. With invoice factoring, we look at different things when it comes to getting your funds faster. So, really it’s the business owner’s decision on, “Hey, when do I need this money?” If I need to make a new project and start bidding on a project for next week, I can’t wait for a loan. I need that money as soon as possible, maybe the same day.  

And we have options to do that, which would allow them to go out and buy a snowplow that they need to do a job next week. There are different timeframes for every different industry, but I find that a lot of industries want to get paid as fast as possible so they can continue to grow their business.  


Last week I ran into two companies who are doing supply chain financing. And I said, is it kind of like factoring? And they’re like, “Woah, woah, woah. Is it?” I felt like I insulted like their mom or something. Woah, woah. No, no, no, no, no, no, no, no, no, no, no. And then there’s this long diatribe and I’m like, “God, it’s kind of sounds like factoring.”  

You know, that’s the great thing about mute on teams is that you can say it sounds like factoring. “Did you say something?” “No, I didn’t.”  

Let’s go. Let’s get into it. Okay. Is it a dirty word?  


So let me offer what we’ve learned and what we’ve seen in my experience, our experiences, when it comes to factoring. If you look traditionally inside the industry, traditional factoring has definitely created some reputation for itself and what you see in traditional factoring businesses, but you can see this across any lending facility businesses in a traditional context is their relationship is with only one customer, which is the borrowing.  

Okay. Commercial customer. Okay. The borrowing business partner. And they’re purchasing the outstanding receivables of that business. And under those laws and UCC regime, there’s quite a bit of license-ship and power that goes along with those organizations and those lending providers. And when that happens, there are obviously, right, like no one’s perfect inside of an industry.  

And there’s definitely plenty of providers who have taken action against the businesses. In order to get the money that they’ve extended out to be able to get it back. So that lawsuit, that exists and it can get a little bit tough.  

But where I struggle with this – and this is again, just in Becky’s experience and I would encourage Jon to go ahead and jump in – when we step back the concept underneath factoring is the equivalent of a, “I’d like you to give me something in exchange for some, some kind of collateral or asset I have.” This has been around for ages. This is bartering, right? Like I used to come to you with like chickens and you used to go ahead and give me all kinds of vegetables for the supplier businesses.  

Whenever they do have outstanding invoices that are owed to them, that they’ve serviced, they’ve done a really great job. They’ve provided quality services for the customers and they’re really just waiting on the money for those owed invoices to be able to come in. They have done everything that they were supposed to do all in good, honest faith and earn faith.  

And so they want to be able to borrow against that money they know is up and coming. And what I liked about the way Jon positioned this is it’s getting away from this concept of using those types of access to capital and access to cash only as mechanisms when there’s a problem. We often hear inside the market of like, “Oh, well, you know, you can use factoring or you can open up a credit card if there’s an issue. You can’t make payroll. You can’t …”  

Yet all those things happen. But there are negative reasons and there are positive reasons too.  Smaller businesses are becoming more sophisticated about the way that they extend their capital, the way that they borrow against their business and the way they fuel their growth. And betting on collateral that you know is owed to you is safer than borrowing openly against nothing.  

It’s your money. It’s your money. It was owed to you. Right? What we’re talking about here is a difference in the timing.  


I think that the need like I need to make payroll, I need to pay the light bill. It feels predatory. Oh, and that’s where I think the negative aspect of factoring comes into play.   


And that’s heartbreaking. I would completely agree with that. And like I said, don’t get me wrong. Those situations can happen. Surprises can happen for small businesses. And again, they’re small, so they’re exciting and dynamic, but they’re also fragile, right? And so the unknowns can happen. And when those unknowns happen, it’s great to have backup plans. But there are also tons of positive opportunities around growing your business.  

And I would offer you this – if you think about the standard cost of borrowing when it comes to like, just say traditional factoring and let’s throw out, I don’t know, an interest right now averages somewhere around between 4% and 7%. If someone said, I’m going to charge you 4% but I can go ahead and you can use the capital that you’re borrowing to go get this customer that’s going to 40% grow your business would you do it?   


Yep. There are suppliers who know that if they are in a situation where something happens out of their control, they’re able to get that money and continue to run their business successfully. So I see that usually as a very positive experience because they know that they have that ability.  

And I’ve had tons of supplier stories on being able to make payroll because something came up – a big vehicle broke. Something came up that caused issues with the business and the cashflow and they knew that they had us to rely on. And that’s a very positive experience.   


How is that traditional quote-unquote factoring and AvidXchange’s Invoice Accelerator – how’s it different, how’s it the same?   


So it’s different in a couple of ways. One of the ways is that when it comes to actually being able to be eligible for that, the agreement is between AvidXchange and the supplier.   


When you think of factoring in its traditional sense and what AvidXchange does, what’s the difference?  


Let’s go ahead and look at traditional factoring. Lots of paperwork, heavy credit checks, super painful, right? Now you’re providing all kinds of proof points. And then on top of that, it’s typically a very manual process for the supplier. And there’s a lot of interactions that have to happen with anyone just to go ahead and get started.  

If you were trying to think about this as a strategy for an upcoming issue or an opportunity you wanted to take advantage of this week, you can go ahead and let that pipe dream go. Now, let’s talk about our network. Because our network is very, very customer-focused and we really care about that.  

But more importantly, AvidXchange is strategically positioned in where we’re at – sitting and looking across the network and the orchestration of the transactions to be able to understand a lot about suppliers, even before they show any kind of interest in something like this. So out the gate, we focus first on creating a super modern enrollment experience.  

They don’t have to talk to anyone. They can go ahead and they can just get right into the application. They can fill it out with just a couple of clicks, so it’s very efficient for them. They provide key details and information, and we’re immediately processing it against our network data in real-time, which is fantastic.  

That’s already a much more modern experience than what they typically experience. They have options too that are convenient. They could accelerate all of their payments, or they could select which payments they’d like to get faster funding for as well, which is also very, very different than what you would find in the traditional space.  

They can see their different customers. They can see their different invoices and payments transacting through our network. They can see what’s happening with them in real-time. It’s a much more modern experience overall, and it makes it nicer for any business that’s trying to operate in different time zones, on different coasts and in different zip codes, right?  

And it’s very thoughtful in that perspective. And the last thing that I would share is that because they’re a supplier in our network, they have transactions that are flowing through our network. What’s happening is they’re borrowing against invoices that we have. And when the payment comes through, we’re automatically able to conveniently capture, reconcile and settle that transaction.  

So they’re not having to do anything weird around asking their buyers or their customers to change their processes or protocols like sending out uncomfortable notifications. Their customers didn’t have to change anything about the way they were working, and the supplier didn’t have to change anything about the way they were working and they were able to borrow money very, very quickly on their schedule.   


Is it frictionless? It’s frictionless. That’s what people are talking about. But Jon, so you have an entire team that helps suppliers and vendors with this process?  


Yeah, absolutely. So we have a team of account managers that will reach out to these suppliers that have their invoices coming through the system and offer this as an option against what we talked about earlier in the podcast, the traditional lending. It’s very seamless. They can choose what invoices they would like to get paid as soon as the next day.  

And be able to, like I said earlier, start on any other kind of projects or just manage their cashflow to continue to grow the business, which I’ve said multiple times throughout this podcast and that’s something that I’m very passionate about. But the team itself is reachable, whether you want to use the seamless product of doing it yourself, or you want to actually talk to somebody – you’re able to do so, which I love my team. Great team. But it’s just a very good solution for suppliers in our network to be able to use this product.  


We talked about stories, so maybe it’s a good time to share some stories you already mentioned the truck and the plow?   


I did start on the phones talking to our suppliers. So I have some background there and one particular supplier several years ago. I had reached out to him via email. He called me back and he said, “I didn’t know you guys had this product.” And I was like, “Yeah, you know, you have the X, Y and Z amount of money that you can choose from right now if you needed it for …” and I said, “Oh, what do you do for your business?” And he said, “I do snowplow.”  

And I was like, “Well, if you need it for a new snowplow.” And he said, “Are you psychic?” And I said, “No.” And he said, “Well, I need a new snowplow.” So basically, he was able to use that right away, got him signed up through our portal and he was able to accelerate his payment and got paid the next day.   


That’s because you read his mind?  


I read his mind. It’s crazy. It just happened to be a very random call. I made the call and he needed that product and he needed that snowplow.   


How many snowplows did he already have?  


He already had three, but one had just broken down. Oh, okay. So it was literally within that week that happened to him. And that comes down to where it’s just like, this is an awesome option for somebody that needs money very quickly to be able to complete a job and he had to do it, I think, the next day.  

That was one scenario. We had another supplier that – we all make mistakes. The supplier accidentally sent his invoices to the wrong inbox and he didn’t pick it up until two weeks later, which means the process is going to flow through and they’ll get paid. However, he needed it quicker and based on the mistake, he was able to use our product and get paid.  

He was extremely, extremely appreciative that we called him because he also didn’t know that we had this product at AvidXchange. But just goes to show you that having other options to get cash fast is a great thing. Stuff happens. It happens to all of us.   


And what’s your reaction to the stories? Did you have any of your own?   


It doesn’t surprise me at all. Of course not. It doesn’t surprise me at all. It’s super interesting when we spend time talking to our suppliers. We do customer satisfaction, you know, like any other good partner, we’re doing customer satisfaction, NPS and all kinds of good surveys to understand our suppliers who take advantage of being able to take control over their cash flow and deciding when they get the funding, that control and have that ability to manage that are so much happier.  

They just sleep better at night. They feel so much more secure. They really are. They’re there overall. There are some of the happiest suppliers we have in our network. And it’s simply because we’ve provided them with a channel, a mechanism to be able to control that aspect of their business, which you said is the oxygen for their company.   


It’s their money. And it’s just being tied up for no reason. The thing is that traditional lending sources are hit and miss. I’m not going to say negative or positive, but they’re just a lot of hoops to jump through. And then the thought is that factoring is negative, but this is really way beyond factoring because, in a sense, it is frictionless.  

Yes. It already set up. Yes. And the thing I love about that is that when it’s already set up, you make the best decisions when you don’t have to. Yeah. And the thought is, if I’m in a situation where my snowplow’s broken and I need cash, you start to panic and then you take money from your cousin, quote-unquote, and then they come for an arm and a leg later – that’s pretty bad.  

So this is already set up frictionless. And then it’s available when you need to make a decision. That’s right. So, that’s the modern-day Invoice Accelerator at AvidXchange. We talked a lot about what was going on. What’s in the future?   


The future I think is just even more faster payment methods, which, would be something like RTP. So real-time payments, business-to-business right now.  

 We have consumer-to-consumer out in the market where I could pay you immediately for that coffee you just came and got me. Can’t do that yet in business, but in the future, that’s something that I would expect to see coming, which is awesome. I want to be paid within 30 seconds of delivering that load or I want to be paid right away for mowing that yard or anything like that. That’s how I see the future. I don’t know, Becky – what you would think, besides real-time payments, which I don’t know how much faster you can get than real-time, but maybe there’s a possibility you can? 


I think the real-time payments platform that’s brought forward with you know, FedNow and the activities they’re doing and it’s been super interesting to watch their growth. I believe that’s going to play a pivotal role in the next couple of years and where we’re headed, especially with the capabilities regarding a request for payment that comes from the submission of invoice documentation.  

We haven’t seen global platforms perform that kind of activity before. It’s interesting because it has great potential to be disruptive. In the sense that it’s performing that document orchestration in a way that we haven’t seen before but it also neutralizes the market and some of the AP and AR automation industries.  

So, that plays a big piece. We’re also seeing huge traction in security platforms, security and authentication capabilities, and the platforms that are coming out from that. People are both from a customer perspective, from a partner perspective, network perspective, no matter who you are – digital threat and digital security is of the utmost importance. And you’re seeing that front and center. It’s a pillar of how we think about our growth here at AvidXchange. And so that’s front and center for us too. And so we’re watching the evolution of those platforms, document exchange platforms, request for payment being paired together with real-time payment and how that starts to affect like how businesses think about funding activities, interaction activities, and negotiating on kind of those terms.  

I feel like most businesses are moving past the days when you’re paying attention or trying to live off a float. And you’re recognizing that if you’re going to compete, that this is the direction where funding and where invoice transactioning is headed. And so every business is going to have to figure out how to build value and compete on competitive capabilities.  


Gone are the days of sitting on cash. Gone are the days of sitting on checks. So I see checks going down. I see digital going up. I see security strengthening, becoming a forefront and real-time payments. I think it’s going to disrupt some of the older ways of working and it’s going to cause even more of a paradigm shift than what’s happening today inside the industry of a move to digital automation.  


Put a bow on this, Jon, any final thoughts on this?   


I just think, like I said, I’m very passionate about businesses and them being able to grow. And like Becky mentioned earlier, it’s not necessarily when you need the money, you can plan and grow your business around using a product like this. And I think it’s just a fantastic product. And that’s why I’ve been working on it for five years.   


There you go.   


I just say as AvidXchange continues to grow and build as becoming a trusted partner, for our suppliers and our buyers, so all of our customers will be able to sit in the middle of those interactions, not controlling, but orchestrating healthy dynamics and providing services that help both sides grow is just going to yield a better outcome for everyone and is really what we hope to aspire.  


There you go. Yeah. Couldn’t have said it better. Becky, thank you. Jon, thank you.   


Chris, thank you. Thank you for having us.   


Thanks for listening to the Net30 podcast presented by AvidXchange. I desperately need to know what you think about this. Leaving a five-star review would be fantastic. You can subscribe to the channel, too. And oh, by the way, while you’re waiting for the next episode, head over to AvidXchange.com to learn more.  

Okay, one more thing – if this conversation has piqued your interest, we’re going to ask you to call this number – 980-414-5401.    

Thanks again for listening to the Net 30 podcast. And we’ll see you really soon.  

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