What is invoice financing?
Invoice financing is a type of capital that a business can access where the funds are sourced from the company’s unpaid invoices. Invoice financing is a good option for small businesses and B2B businesses that have a lot of customers with a regular flow of income from invoicing. Invoice financing is a useful option for small businesses that need a short-term infusion of capital to cover expenses and may not qualify for more traditional loans due to low or bad credit scores.
How does invoice financing work?
Invoice financing is essentially a cash advance funded by a business’ unpaid invoices. The invoices serve as collateral so often no additional credit check is needed. An invoice financing company will review a business’ accounts receivables and then agree to take on a specified number of unpaid invoices. The invoice financing company will then advance a percentage of the total, generally around ten percent, upfront. You get the remaining balance, minus a fee that the invoice financier takes, when your customers pay their owed balances.
Invoice financing example
A landscaping company has a rotating repository of nearly 100 customers at a given time with many repeat customers. They provide services year-round to small and large clients, including some businesses and municipalities.
The owner of the landscaping business is interested in expanding its reach by purchasing a fleet of winter equipment, including industrial snow blowers and four wheel drive trucks. The only problem is that they don’t have the available liquid capital to make the purchases ahead of the winter season. Their credit isn’t great because they are a fairly new company and don’t have a long enough credit history to qualify for more traditional loans needed to purchase the equipment and grow their business.
So they turn to invoice financing as an option. The invoice financing company does not conduct a credit check. Instead, they review the company’s accounts receivables and offers a percentage, generally around ten percent, of the unpaid balance in upfront funds. The rest of the funds get deposited when the customers pay. The invoice financing company takes a fee, generally a percentage off the top, and the business has quick access to cash to buy that equipment and expand its business. All without having to pay back money at a later date.
How do small businesses use invoice financing?
Small businesses may use invoice financing to cover one-time or short-term needed expenses to cover overhead or purchases that require a big upfront cost. They can submit unpaid invoices to an invoice financing company and receive a percentage upfront, with the balance paid when the customer pays their outstanding balance. The funds may be used for any number of expenses, including overhead like rent or mortgage, payroll, benefits, supplies or equipment, or other investments in growing or scaling the business.
Pros and Cons of Invoice Financing
- Invoice financing funds are paid from your own accounts receivable so no need to scrape for funds to repay, as with a loan
- You retain the direct relationship with your customers, the invoice financing company does not
- Funds available quickly
- No credit history or check needed
- Fees mean you don’t keep the full amount you’re owed
- If customers do not pay, you are in a bind
- Invoice financing can interrupt cash flow if you depend on the unpaid invoices for other expenses
- Can be expensive. Fees can range from 1 to 5%, but some rates can be much higher, and cost more than the interest on more traditional loans
How does invoice financing help growth?
Invoice financing can provide a necessary cash infusion to help a business grow or scale. It takes capital to make capital, and often small businesses do not have the upfront capital to invest in the infrastructure needed to expand. Invoice financing can be a helpful resource to bridge a businesses present with a successful future.
Who should consider invoice financing?
Companies that need fast access to capital to cover needed expenditures and have regular customers, but do not have other avenues should consider invoice financing.
Businesses that have active accounts receivable are the most likely to qualify and find invoice financing a useful option. Examples include businesses that operate in the B2B space or that regularly invoice customers. Invoice financing may particularly benefit businesses that have a customer base that tends to pay outstanding invoices late, as the financing can make up for cash flow shortages that would normally be available if payments were made on time. Invoice financing is also a good option for those businesses that might not qualify for more traditional loans, either because they have a relatively young or bad credit history.
When to consider invoice financing?
Invoice financing is a good option to consider when a business has outstanding invoices and trusts that their customers will pay, but needs a cash infusion to cover expenses or an investment sooner.
For instance, if you run an educational software company and are looking to invest in building a new platform that hosts the next suite of classroom math and science programming. That investment requires an upfront infusion of capital that you may not have. What you do have is a lot of outstanding invoices with educational institutions that owe you money. Invoicing financing will enable you to essentially get an advance against your accounts receivable and be able to pay for the software build needed to grow your offerings and business without borrowing net new funds that you will need to repay. Invoice financing may be the right option to pursue.
How to get invoice financing?
When a business is ready to pursue invoice financing, the application process is similar to other types of capital lending in some ways. A business can apply online and would need to submit proof of the outstanding invoices along with business credentials. The invoice financing company evaluates the business application and makes a determination, generally very quickly, and shares the amount approved and associated fees that will need to be paid.
Where to find the best invoice financing option?
Invoice financing options vary in terms of what fees they charge and how much they will lend. Take advantage of resources like BusinessLoans.com to price comparison shop and find the best invoice financing option for you and your business.
How to apply and qualify for invoice financing?
Invoice financing can be a viable option for your business to get a cash infusion without having to go through traditional lenders that require credit checks and repayment terms and conditions. Consider the pros and cons as well as your short and long term business needs, and make the decision that’s right for you business.
No. Invoice financing is less risky than other forms of loans because it’s against your own unpaid invoices and the majority of the funds do not get released until your customers pay.
Not typically. Generally, invoice financing companies or smaller lenders offer invoice financing, not more traditional banks.
Invoice financiers make money by taking a percentage of the invoices the business submits.