invoice financing

Business Invoice Financing

Invoice financing is similar to invoice factoring except that you don’t sell your unpaid invoices directly to a factoring firm. Instead, the invoices are used as collateral to obtain a cash advance.

Pros:

• Quick cash

• Customers won’t be able to tell if their invoice is being paid.

Cons:

• Comparable to other options, the cost of this option is much lower than others.

• The invoice payment must still be collected by you.

Ideal for:

• Businesses seeking to convert unpaid invoices into quick cash.

• Companies that wish to keep control of their invoices.

Invoice financing can be a good funding option for business-to-business, or B2B, companies with cash tied up in unpaid invoices.

Businesses can borrow capital from unpaid invoices to finance their business. This financing is useful if you have to finance short-term expenses, manage cash flow problems, or if you are unable to qualify for a smaller small business loan.

Here are the basics of invoice financing: how it works, and where you can get it for your company.

Invoice financing

What is Invoice Financing?

Small-business owners have the option of receiving an invoice financing loan to pay off outstanding customer invoices. This type of business loan can also be called invoice discounting or accounts receivable financing.

Invoice financing allows you to use your invoices as collateral. Although invoice financing is more affordable than small-business loans due to this, borrowing costs may be higher. The invoices remain your property and you are responsible for collecting payments.

You can structure your invoice financing as either a loan or a line credit. Sometimes called an accounts receivable credit.

invoice financing

How Does Invoice Financing Work?

Invoice financing allows you to borrow a percentage of the unpaid invoice amount. This could be as high as 90%. You receive the remainder of the invoice amount, less any company fees, when your customer pays it.

Although invoice financing companies may charge fees in different ways depending on the invoice value, they usually charge a flat percentage (1% – 5%).

Here’s an example showing how invoice financing works.

• Funding has been received. Let’s assume you want to finance a $100,000 invoice on 30-day terms. The financing company advances you 90% ($90,000.

• There are fees. For each week that it takes for your customer to pay the invoice, the company charges a 2% charge. You owe $4,000 to the lender for each week that the customer does not pay the invoice. This fee is 2% of the $100,000 total invoice ($2,000).

• The lender is repaid and you collect the payment. After the customer has paid the invoice, you will keep $6,000 and send $94,000 to the lender (the original amount plus any fees). The fees you paid total $4,000, which is approximately 53% APR.

invoice financing

Pros and Cons of Invoice Financing

Pros

• This is ideal for seasonal businesses and business-to-business firms. Businesses that deal primarily with other businesses will find invoice financing most useful as outstanding invoices are required to get funding. These businesses can benefit from invoice financing to alleviate cash flow problems caused by unpaid invoices.

• Invoices are used as collateral. Invoice financing can be more difficult to get than other types business loans because it is backed up by your invoices. When evaluating applicants, lenders typically look at your customer’s payment history. This means that you might still qualify even if you have poor credit or are a startup.

• Funding is fast. Invoice financing companies often offer quick funding. They can often provide funding within 24 hours. This can be very beneficial if you are facing cash flow problems or an emergency.

Cons

• It can be costly. Although invoice financing fees may appear to be affordable at first glance, they can range from 1% to 5 percent of total invoice value per monthly. However, when you convert these fees into an annual percentage rate (APR), rates could rise up to 79%. This is a lot more than SBA loans which typically have APRs of 5.50% to 8.

• Rely on customer payments. You pay fees based on the time it takes for your customer to pay the invoice. It’s hard to predict the total cost of invoice financing upfront. An invoice financing company might charge additional fees if your customer fails to pay or is late. If your customer fails to make payment, you are exposed to greater risks.

• B2B only. Direct-to-consumer companies will have a harder time getting this type of financing as they usually require immediate payment for products or services.

invoice financing

Invoice Financing vs. Invoice Factoring

Sometimes invoice financing can be confused with its close cousin invoice factoring.

Factoring allows you to sell your invoices at a discount to a factoring firm. After you receive payment from your customer, the factoring company will take over collection. Once the company has received payment from the customer, the factoring company sends you the remainder of the money, less any agreed-upon fees.

Factoring is a good option if you are willing to give up control over invoices and if you feel that the factoring company will be professional and respectful when dealing with customers.

Invoice financing, however, allows you to retain control of the invoices while still dealing directly with your customers. The lender will pay you a percentage or all of the upfront money. You get the balance of the invoice when your customer pays it. This is less the fees that you agreed to pay to the lender.

For businesses who want to keep control of invoices and work directly with customers, invoice financing is often a better option.

invoice financing

How to Get Invoice Financing?

Online lenders and fintech companies offer invoice financing. Invoice financing is less common than other types of business loans.

FundThrough and Porter Capital are two examples of invoice financing lenders. AltLINE and Triumph Business Capital offer invoice factoring.

You may be required to provide the following information in order to apply for invoice finance:

• Basic information about your company.

• Statements from business banks

• Business financial statements, such an accounts receivables aging report.

• You’d like invoices to be financed.

• Credit scores for personal and business purposes.