Unlike large companies that have sufficient capital, small and medium-sized businesses are often stone broke, often due to outstanding payments. This is such a frustrating period for business owners, especially those who have to wait for two or three months before payment arrives. These long payment cycles can lead to serious cash flow constraints, causing several significant problems such as unable to pay suppliers, unpaid debt repayments, unable to buy inventory, unpaid staff wages and loss of contracts.
During such situations, business owners often consider business loans to bail them out. However, the time-consuming approval process, tons of paperwork, and strict requirements mean that finding a business loan to meet your financial needs at the right time is indeed an enormous task.
This is where invoice financing comes into play.
Table of Contents
- 1 What is Invoice Financing?
- 2 Features of Invoice Financing
- 3 Qualification Requirements
- 4 How to Apply For Invoicing Financing?
- 5 Documents you need before applying:
- 6 Why Consider Invoice Financing?
- 7 Advantages of Invoicing Financing every small business owner needs to know
- 8 Situations You Can Use Invoice Receivable Financing For:
- 9 How does Invoice Financing Work?
- 10 Invoice Financing Vs. Invoice Factoring
- 11 How Much Does an Invoice Financing Cost To Businesses?
What is Invoice Financing?
Also called invoice receivable financing or invoice discounting, is a type of assets-based funding solution that allows business owners to improve cash flow and working capital when having long invoice cycles. This is one of the fastest and easiest ways to get immediate access to cash without needing a loan. You don’t need to wait for invoice payment and can make repayments when the money comes in.
The invoice serves as collateral, so you won’t have to worry about submitting real estate, inventory, blanket liens or other costly forms of collateral. With invoice financing, you typically receive 80% to 90% of the invoice value upfront based on the risk profile of your business. However, depending on the lender, you can get up to 100% of the invoice value.
Features of Invoice Financing
Requires no collateral, invoices act as collateral against money borrowed.
Enjoy convenient repayment tenor on your business invoice financing until you receive payments from your customers.
Generally 1.5% to 3% above the base rates in the market
Approx. 3% + %/wk outstanding
Hassle-free loans approve within 24 hours
It is easier to qualify for invoicing financing than traditional funding because of its financing structure. As long as your business has a B2B model and currently have account receivables, you can qualify for invoicing financing.
However, the qualification and loan amount depends on the quality of the invoices, which you’ll want to review before applying. Since your invoices will act as collateral, it’s important to make sure that it makes sense to your lenders to finance your invoices.
Though you will have to meet the following conditions to qualify for invoice financing:
- Business should be formalized through a corporate structure such as a Corporation (Inc.), Limited Liability Company (LLC), or a similar alternative.
- Customers must have an excellent credit history
- Business must have a minimum turnover of $50K
- Business must have commercial and government clients
- Profit margins must be above 10% to 15%
- Business should not have an open bankruptcy
- Invoices should have been already issued.
- Company background should be neat and clean
While these above factors play an important role in getting invoice financing for your small business, it’s not the only thing considered when making approval decisions. Depending on the lender, many different things can affect your eligibility. So, it’s vital to discuss your requirements with your lender and determine what works best for your small business.
How to Apply For Invoicing Financing?
Compare various small business financing options to get started with Invoice financing. Usually the application process for invoice financing is pretty quick and simple. Thanks to the streamlined online application processes of invoice financing companies participating in our Marketplace which make it easy for the businesses to upload invoices they need to be financed. The advanced techniques, qualified financial experts and top-notch customer service of these lenders will help businesses to apply and get a credit seamlessly.
Documents you need before applying:
- Driver’s License
- Voided Business Check
- Bank Statements
- Credit Score
- Outstanding Invoices
Why Consider Invoice Financing?
With the frequent difficulty of obtaining bank loans, invoicing financing can prove to be one of the smartest funding options for your small and medium-sized business. It’s quick and convenient, providing a swift increase in cash flow. As invoicing financing provides predictable working capital in less time, it allows businesses to cover their various expenses promptly and use the additional cash to take advantage of more opportunities to help the business grow and profit.
Advantages of Invoicing Financing every small business owner needs to know
- Faster than traditional financing options
- Fees are low
- No long term commitments
- The quick and easy loan approval process
- Gain zero new debt
- Instantly improve your cash flow and boost revenue
- No collateral required
Situations You Can Use Invoice Receivable Financing For:
The Funds that you borrow by selling your accounts receivable to a lender or invoice financing company can be used for any business purposes. Here are the situations you might think of using an invoice financing for:
- Launching new products
- Hiring new employees
- Buying supplies
- Paying for company expenses
- Purchasing or moving to a new business location
How does Invoice Financing Work?
The process starts when you decide which invoice financing company or alternative lender to work with. Once you finalized the lender, you can start selling your outstanding invoices for working capital. After perfectly verifying the invoice, your business and customer, the lender lends you 80 to 90 percent of the invoice. The remaining 10 to 20 percent sits in reserve.
From that 10 to 20 percent, your lenders might charge fees such as processing fees, draw fees, or maintenance fees. Once your customer eventually pays the invoice, the lender pays you the remainder of the invoice minus fees.
Invoice Financing Vs. Invoice Factoring
There is a different kind of financing that falls under the realm of invoice financing is called invoice factoring. The only difference between them is that invoice financing is confidential and factoring is not. Invoice factoring is a way to get working capital by selling your invoices to a third party (a factor or factoring company). It can be provided by independent finance providers, or by banks.
How Much Does an Invoice Financing Cost To Businesses?
Invoice financing or factoring costs are entirely dependent on the lender you are working with. Several different costs will impact the price you pay for an invoice financing or factoring. The lender will take into account the following factor:
- Number of invoices you want to release funds from
- How many invoices you finance
- Value of each invoice
- Your industry and sector
- The track record of your clients
- The size of your business
Since your fees vary by lender, it’s a great idea to review carefully before applying for one. Here are some fees that may be tacked onto your offer:
- Invoice processing fees
- Application fees
- Factor fees
- Automated Clearing or Bank Wire fees
- Monthly minimum fees
- Early termination fee
For example, you raise an invoice to your customer for $5,000, the lender provides you 90% of that invoice. You can then draw down $4,500 as soon as you allocate the invoice to the lender. The lender will release the remaining 10%, after taking their fees (let’s assume 3%) of $150, which leaves $350 more available to you.
Image via Freepik