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What is Invoice Financing?
Invoice financing or often called accounts receivable—allows business owners to finance unpaid invoices. Invoice financing companies advance you cash collateralized by your unpaid invoices, giving you an excellent way to put money back into your business. With invoice financing, you can get a fast advance of about 85% of the value of your invoices, with most of the other 15% paid to you on a later date.
What Business Qualifies?
Any business with a business-to-business model are eligible for invoice financing, as long as they currently have outstanding receivables.
Here’s the deal though.
These lenders don’t concern themselves as much about your revenue, profitability, or time in business.
Since your invoices will act as the loan’s security in this situation, lenders just want to make sure the invoices make sense for them to finance. The rest of your business isn’t that much important.
The maximum amount you can qualify for depends on the total amount and quality of your outstanding invoices, as well as on your credit rating.
It is important to note here that some accounts receivable financing lenders do take a look at your credit scorecard, too.
How to request?
An invoice financing application is a really fast and simple process. Because your invoice determines the amount and terms of the financing you can qualify for, the invoice itself will be an important part of the application process. (Some invoice financing companies will look at your credit rating and business financials too.)
Most invoice financing companies have guided, online application process. Companies like Fundbox or BlueVin will typically connect to your business’s accounting program, making it easy for you to upload the invoices which you need financed.
How it functions?
One of the most irritating aspects of running an expanding business is waiting for your invoices to be paid—especially when some customers fail to pay on time.
And delayed payments means you don’t get to funnel that capital back into your business straight away, tying up your working capital and creating a whole host of trouble for you and your business.
At Best Option Funding, we see this problem all the time with small business owners. That’s why we offer accounts receivable financing on our very own marketplace.
With accounts receivable financing, you have the chance to get paid for your invoices right away with no waiting time.
How Invoice Financing Aids in Cash Flow
What if you could guarantee you’ll see cash for those invoices right away?
That’s essentially what accounts receivable financing—also referred to as invoice financing—can do for your business.
While invoice financing can at times be a fairly expensive way to fund your business operations, it gives you a more predictable cash flow to work with, helping you smooth out your operations from month-to-month.
If you’re running short of capital or urgently need to meet upcoming expenses—like taxes, payroll, or even getting started on your next project—then invoice financing can take that burden of your business.
Plus, you’ll definitely sleep better at night with a consistent inflow of cash.
How Invoice Financing Functions
Once you agree to collateralize some of your invoices for a loan from a financing company, then they’ll pay you around 85% of the total value of those invoices.
The remaining 15% then gets held in reserve and subjected to fees until your customers are able to pay off their invoices. From that 15%, your lender first acquires a processing fee—often at times around 3%. They’ll then charge a “factor fee” which depends on how long it takes for your customer to pay up, almost always calculated on a weekly basis.
For example, many lenders charge 1% each week until the payment.
Then you’ll receive that 15% minus those fees—which are essentially the price you’re choosing to pay for cash now instead of waiting for your customer to pay your invoices now.
Simply put: Accounts receivable financing is a convenience fee for your business’s working capital.
A Different Kind of Invoice Financing: Invoice Factoring
Although that’s the typical experience, there are other kinds of accounts receivable financing.
Some accounts receivable financers can simply advance you 100% of your outstanding invoices. In return, you need to pay the lender back weekly over a set period of time—most of the time around 12 weeks—until the advance gets cleared up.
In this case, you’re never need to wait for the customer to settle your debt, although this sometimes means your lender will collect the payment from your customer instead.
Another type of financing which falls under the realm of accounting receivable financing is called invoice factoring.
Invoice factoring is very similar to invoice financing with one significant difference: the invoice factoring company is purchasing your accounts receivables. And in this situation, most of these factoring companies will collect payments from your customers on your behalf.
What Will Invoice Financing Cost You?
As we’ve mentioned before, invoice financing can be an expensive way to receive funding for your business. But it’s essentially the cost of having cash in your hand right now, instead of later.
Here’s a discussion on how the cost structure would look like.
Financing & Associated Fees of Accounts Receivable Financing
Let’s say you have a $100K invoice with 30-day terms.
A financing company might immediately advances you 85% of the value which is amount—$85K—and holds $15K in reserve.
Your customer then pays that invoice 2 weeks later. After subtracting the 3% processing fee of $3K, the financing company keeps its factoring fee—1% per week, which in this scenario is 2% or $2K—and gives you the $10K which is left.
When is Invoice Financing An Option?
You might have a feeling that $5K is a steep price to pay—but that depends on your business’s financial need and requirement.
If you needed money to make payroll a week after sending out that invoice, then your accounts receivable financing lender’s fees don’t seem too bad after all.
Your business’s financial situation might get benefited from that extra cash flow—so some capital right away can definitely be worth those fees in the long run.