What is Invoice Financing
Invoice financing (also called accounts receivable financing) is one of the most popular small business loans that allow businesses to use unpaid invoices as collateral in exchange for upfront cash. Invoice financing companies advance 80% to 95% of the total invoice value upon approval. Once your customers pay their dues, you’ll receive the remaining 5% to 20% (minus a small transaction fee).
The main benefit of accounts receivable financing is that it frees up the cash tied to your outstanding invoices. With more capital available, you can cover day-to-day expenses, take in more customers and invest in growth opportunities.
Loan Amounts
$25,000 – $10,000,000+
Rates
Starting at 12%
Speed
As little as 24 hours
Key Takeaways
Invoice financing allows B2B companies to use unpaid invoices as collateral in exchange for upfront cash.
This type of financing is best for industries that regularly invoice other businesses, such as retail, wholesale, manufacturing, marketing services, distributors, and more.
Invoice financing only applies to B2B companies with outstanding invoices. B2C businesses that typically require immediate payment for products and services may not qualify.
How Does Invoice Financing Work?
Here's how invoice financing works:
Step 1. Invoicing
You invoice your customers for the services rendered or products sold.
Step 2. Send your invoices to a lender.
You send your invoices to your lender in exchange for working capital.
Step 3. The lender evaluates your application and invoices.
After submitting your invoices, the lender will evaluate your business's eligibility. They typically perform a background check on both the company and its customers. However, lenders are more concerned with your customers’ creditworthiness since they’re the ones repaying the invoices.
Step 4. Approval
The application and approval process for invoice financing is faster compared to other loan options. Generally, you can claim the cash at least 24 hours after the approval.
The lenders can either set the invoice financing as a term financing where you’ll receive a lump sum of cash or a line of credit where you’ll be given access to a credit line with a set limit.
The lenders can either set the invoice financing as a term financing where you’ll receive a lump sum of cash or a line of credit where you’ll be given access to a credit line with a set limit.
Step 5. Customers Pay Their Invoices
Your customers will directly pay their invoices to the lender you’re working with. This arrangement may vary, so be sure to check in with your lender.
Step 6. Payment
Once your customers have paid their invoices, the lenders will deduct the amount due to them. They will then send the remaining balance over to you minus the fees.
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What are the Pros and Cons of Invoice Financing?
Just like other forms of business loans, invoice financing is not for everyone. Take a look at the pros and cons of invoice financing so you can weigh your options and make informed financial decisions for your company.
Pros of Invoice Financing
The invoices are the collateral. You don’t have to pledge other business or personal assets like real estate or inventory since the invoices are the collateral for the loan. This makes it easier for companies with bad credit to qualify and secure funding.
It can be inexpensive if your customers pay on time. Invoice financing can be expensive compared to other business loans, but it can be cost-effective if your customers pay on or before their due date. For traditional loans, you pay interest throughout the life of the loan. But for invoice financing, you’ll only need to pay the fees when the invoices are unpaid.
It helps improve cash flow due to unpaid customer invoices. You don’t have to wait 30 to 90 months to get your money. The money you get from invoice financing can help with cash flow issues since you can use the money for almost any business purpose.
It gives you fast access to working capital. One of the best perks of invoice financing is that it requires minimal documentation, and you can receive the money within 24 hours after approval. This is especially helpful for companies facing unforeseen expenses.
It’s easier to qualify for compared to traditional financing. Instead of focusing on your credit score and other financials, invoice financing companies are more interested in your invoices and customers’ creditworthiness. This makes it easier for companies with bad credit or insufficient business history to qualify.
Cons of Invoice Financing
Not an option for B2C businesses. You need to have outstanding invoices to qualify for invoice financing. B2C companies typically require immediate payments for the products and services they offer, so they may not be eligible for invoice financing.
Higher fees compared to traditional loans. Invoice financing is generally more expensive than a bank loan. Some lenders might ask borrowers to meet monthly minimums or pay exorbitant prices.
Risky if your customers pay late or default on their invoices. Invoice financing can be costly if your customers don’t pay on time. Some lending companies charge penalty fees for late payments or increase the weekly factoring rate. If your customers don’t pay their invoices at all, you may be asked to repay the lender in full, which could be harmful to your cash flow.
Who Qualifies for Invoice Financing?
Invoice financing is best for small businesses that invoice other companies for goods and services purchased. Ideally, you should regularly invoice creditworthy businesses to get favorable terms and rates. It’s best for industries with long billing cycles like:
- Transportation and logistics
- Wholesale and distribution
- Staffing
- Manufacturing
- Technology
- Retail
It’s also an excellent option for rapidly growing businesses and seasonal companies because they can use the money for growth and expansion. Businesses with slow paying customers also benefit from invoice financing – usually net-60 or longer.
However, it’s not for companies that work with delinquent clients or only has a few invoices to spare. Companies with good credit, cash flow, and sufficient time in business should consider applying for other small business loans, like business lines of credit or business term loans.
Ineligible Invoices for Invoice Financing
Progress Billinghappens when a big project cannot be completed unless a portion of the project has been paid. Construction companies usually do this type of invoice. However, financing companies may not accept these invoices as they typically require invoices to be contingent-free.
Pre-Billinghappens when a small business bills its customers before the completion of a project. Unless the services are rendered or the goods are shipped to the customer, this type of invoice is not eligible for invoice finance solutions.
Milestone Billingis a form of billing where the invoice amount is billed over a set period and at multiple points along the process. When each milestone of the project is completed, the lender will issue a bill.
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Why Should You Consider Invoice Financing?
Many small business owners enjoy the flexibility of invoice financing.
The flexibility of invoice loans allows you to use the money they obtained for various purposes. There are no restrictions on where the money can go, giving you the benefit of using the additional influx of capital however you see fit.
With more cash, you can cover their day-to-day expenses, purchase new inventory and materials, bridge cash flow gaps, resolve tight cash flow from seasonality, and grow your business.
What are the Requirements for Invoice Financing?
The documents required for invoice financing vary from lender to lender, but generally, most will require small business owners to submit one or more of the following documents:
- A/R Aging Report
- P&L and Balance Sheet
- Articles of Organization or Incorporation
- Sample Customer Invoice
- Completed Invoice Financing Application Sheet
- Proof of Identity
How Much Does Invoice Financing Cost?
Invoice financing rates, structures, and requirements vary depending on the lending company. But as a general rule, the rate a small business receives depends on the following factors:
- Type of industry the business is in
- The value of the accounts receivables
- The number of invoices sold
- Repayment period of the invoices
- The creditworthiness of the client’s customers
Typically, the financing company charges around 1 to 5 percent of the total value of the invoices financed. The volume of the invoices plays a significant role in determining how much fees the financing companies will charge a small business. The larger the volume, the lower the fees will be.
For example, let’s say you have a net 30, $100,000 invoice. Your lender advances 85% of that amount, so you’ll get $85,000. The rest will be held in reserve.
Your customers pay the invoice three weeks later.
The lender subtracts the 3% processing fee ($3,000) and keeps a 1% factoring service fee per week. So, 3 weeks = 3% = $3,000.
After the lender subtracts the fees, you’ll receive the remaining $9,000.
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Apply for Invoice Financing Today!
We make it easier for you to secure the funding you need to grow your business. See how much you can borrow.
Applying is free, and it won’t hurt your credit score.
Our financial advisors will get in touch with you to discuss your options at no cost or commitment on your part.
You can also call us at 888-853-8922 or email us at info@smbcompass.com
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