Is It Possible to Get an Invoice Factoring with No Credit Check for Your Business?

Ezra Cabrera | August 19, 2022


    Key Takeaways

    • Invoice factoring is a type of invoice financing wherein the business sells its outstanding customer invoices for extra capital. With invoice financing, the business must hand over their ledgers to the factoring company (or factor), who will then take over the payment chasing and collection.
    • It is possible to apply for invoice factoring with no credit check - at least for your business. However, invoice factoring companies will always check your customer's creditworthiness, as they're potentially taking on a risk and face the consequences if the customer fails to pay their invoices. The factoring company will want to make sure that they're working with a business with credible customers.
    • Businesses seek the help of factors that offer invoice factoring with no credit check for various reasons - one of which is having a poor credit score that makes them unable to qualify for other types of business loans.

    Unpaid customer invoices are common for many businesses. With their capital tied up on the accounts receivables, it becomes harder for the company to meet their day-to-day expenses and take advantage of several business opportunities.Fortunately, business financing options like invoice factoring is available for these types of businesses. Invoice factoring involves selling your company's outstanding invoices at a discount to a factoring company (or factor) to get the funding you need to support business activities.But how does it work? Is there such thing as invoice factoring with no credit check? Can you still get one with bad credit?We'll explain the details below.

    How Does Invoice Factoring Work?

    As mentioned, invoice factoring (or accounts receivables factoring) allows businesses to raise capital by selling their outstanding invoices to factors. Unlike invoice financing, where the company retains control of their accounts receivable ledger, with invoice factoring, the factor will be the ones to chase and collect payments from the customers. That also means that if you're using invoice factoring, your customers will pay the factors directly.

    With invoice factoring, the factors can advance as much as 95% of the total value of the invoices. Once the customers pay, the factoring company will deduct the amount they paid, plus fees, and give the remaining balance back to the business.

    Invoice factoring comes in two different categories: recourse and non-recourse factoring. Here's how each of them works:

    • Recourse factoring is less risky for lenders as the business owners will be responsible for the invoices in the event that the customer doesn't settle their balance. They will either have to pay for the invoice using their cash reserves or replace the invoice with another that is more or less of the same value.
    • Non-recourse factoring, on the other hand, puts much of the risk on the lender's side. Once the lender takes hold of the invoices, the business won't have to deal with them again. In case the business' client defaults on payment, the invoice factoring company will shoulder the losses. Because the risk is higher, only a few factoring companies offer non-recourse factoring. The business' clients should also be creditworthy to qualify for non-recourse invoice factoring.

    Why Do Business Apply for Invoice Financing with No Credit Check?

    Though businesses play a significant role in America's economy, qualifying for a traditional business loan can be challenging. Banks are known for their strict qualifications when it comes to small business loans. To qualify, you have to meet the basic requirements, which include having a credit score of 650 or better, solid business financials, and at least two years of business history.

    Unfortunately, many small business owners are unable to meet those qualifications. For that reason, they may seek other business loan options that don't require an extensive credit check or business history.

    Other reasons why companies might seek invoice financing without the credit check requirement may include:

    • They don't have collateral to secure a more comprehensive business loan.
    • They're concerned about a hard credit inquiry that might hurt their credit score.
    • They're simply exploring other business loan options that don't require a long list of documentation.
    • They're looking for a financing option that requires minimal paperwork.

    Is It Possible to Get Invoice Factoring without Credit Checks?

    Invoice financing with no credit checks does exist. But it will still depend on the lender you work with.

    When it comes to invoice factoring, lenders (at least most of them) aren't particular about your company's credit score. They do, however, take your clients' credit histories and scores into consideration when assessing your eligibility for funding. After all, the repayment for the cash they advanced to your business depends on your clients' repayment behaviors.

    That means if you want to get approved for invoice factoring or at least secure excellent terms for the financing, working with creditworthy clients would help.

    Some invoice factoring companies may check both your business credit score and that of your client. This usually happens if it's your first time using the factoring company's services. Basically, the credit background check will tell the lenders that you're able to meet your financial obligations each month, and therefore, indicate that you're working with responsible customers.

    If you're looking for an invoice factoring company that skips the credit check, it's best to inquire from the company directly if they perform credit checks or not before moving forward with your application.

    How to Qualify for Invoice Factoring Without Credit Check

    Now that we've established that invoice financing with no credit check is possible, you might be wondering how you can qualify for one.

    Having creditworthy customers is the first requirement of no credit check invoice financing. To determine the credibility and reliability of your customers, the lenders may ask you to answer the following questions:

    • Do they normally pay before or on the day the invoice is due?
    • Do your customers have a good credit rating?
    • Does your customer operate in a high-risk industry (i.e., legal, construction, travel and hospitality, health services, etc.)
    • Are your clients reputable? (Government contractors and large commercial businesses usually have a good track record of repayments)
    • Is your client-facing debt or any other legal issues that might hinder them from paying their outstanding invoices when the net term is up?

    Be sure to answer these questions as truthfully as you can. Once the factor finds out you're hiding something, you will hurt your chances of approval.

    Aside from having creditworthy customers, you'll also have to meet the following requirements:

    • The invoices should already be issued. This means that the pre-billed invoices or invoices issued before the project completion will not be accepted.
    • The Business should be free of tax liabilities.
    • Invoices with a net term of no more than 90 days.

    It's worth noting that lenders may handle invoice factoring applications differently and may establish unique qualification criteria. Again, before moving forward with your application, it pays to inquire about the financing from the factoring company first, so you won't have to spend time and effort applying for invoice factoring that you aren't even qualified for in the first place.

    How to Apply for Invoice Factoring with No Credit Check

    Although invoice factoring requirements, terms, and conditions may vary from lender to lender, the process of obtaining one is generally the same for all. If you're thinking of applying for invoice factoring for your business, here's a quick overview of the steps:

    1. Find a Factor

    When applying for invoice financing, it always pays to shop for offers from different factors. This way, you'll be able to compare rates and terms and choose which factor offers the best deal for your business.

    Aside from the offer, it's also helpful to look at other aspects of the financing. While choosing a factor, consider the time it will take for the factor to fund your business. You can easily do this by asking them about their average turnaround time. Working with factors that can get you the funds the soonest possible time would be ideal if you're in a time crunch.

    Additionally, you should also consider the expertise of the factor in your industry. If they deal with businesses like yours frequently, chances are, you might have a better chance of securing funding with flexible terms, even with a bad credit score.

    Some factoring companies may also allow online applications, which many busy business owners may find more convenient.  All you have to do is fill out the form found on their website and attach the documents. Online factoring companies usually have faster approval time as their application process are more streamlined.

    2. Submit the Application and Documents

    After finding the right factor, you'll have to fill out the invoice financing application form and submit all the required documents to the factoring company.

    Again, different companies may require different paperwork. But in general, you can expect the factoring companies to ask you to submit the following documents upon application:

    • Bank statements
    • Balance sheets
    • Driver's license
    • Accounts receivables (A/R) aging report
    • Profit and loss statements
    • Sample customer invoice(s)
    • Tax returns

    Some may require only a few of the mentioned documents above, like proof of identity and bank statements. Others may require the borrowers to submit all of them. If you're not sure, it's always better to ask the factoring company directly.

    3.  Review the Invoice Factoring Agreement

    Assuming that you passed the factor's qualifications and got the factoring approval, the factoring company will send an invoice factoring agreement over for you to review. This agreement is a legal contract, and once you affix your signature to it, the document will bind you and the factor.

    With that, it's always wise to go over the invoice factoring agreement before signing. The contract should outline the financing's terms, conditions, fees, and other details regarding the loan. Be sure that the figure you and the factor discussed upon application is reflected on paper. If not, call the factoring company for clarifications.

    If you can, go over the contract with your business attorney. They will be able to answer any legal and accounting jargons you may not understand, helping you fully understand what the agreement states.

    If you're satisfied with the agreement, affix your signature to it and send the copy back to the invoice factoring company. They should contact you again within a day or two to finalize everything.

    4. Wait for Funding

    Funding for invoice factoring is significantly faster compared to other small business loans. If you're applying online, funding could be as quick as 24 hours after receiving the invoice factoring agreement. If they require you to submit additional documents, funding might take a few days. The length of time for funding will be relative to the lender you're working with.

    The Bottom Line: Is Invoice Factoring Right No Credit Check for Your Business?

    Invoice factoring can be beneficial for businesses strapped for cash and need additional funding to take advantage of business opportunities. Some factoring companies might even be willing to forego the credit check and work with businesses with bad credit. If you're looking for a way to raise capital but worried about getting rejected for one because of a poor credit standing, invoice financing with no credit checks might be for you.

    About the Author

    Ezra Neiel Cabrera has a bachelor’s degree in Business Administration with a major in Entrepreneurial Marketing. Over the last 3 years, she has been writing business-centric articles to help small business owners grow and expand. Ezra mainly writes for SMB Compass, but you can find some of her work in All Business, Small Biz Daily, LaunchHouse, Marketing2Business, and Clutch, among others. When she’s not writing, you’ll find her in bed eating cookies and binge-watching Netflix.