Do you have customers who owe you money for work you have already done for them? Then you can leverage these outstanding invoices in a business loan today.
Are you a small business owner with some pressing financial matters on the horizon? Do you have customers who owe you money for work you have already done for them? Then you can leverage these outstanding invoices in a business loan today. Use invoice financing as a cash advance on money you are going to get anyway.
Invoice Financing: What is it and why does it matter?
Invoice financing is also sometimes called accounts receivable financing. It provides a bridge for business owners who would like to turn their unpaid invoices into something valuable.
With this in mind, there are good invoice financing companies out there that can help companies leverage their invoices. They give you cash in exchange for a security interest in those accounts receivable. This way, you won't have to wait to get paid before you start putting money right back into your company.
With most invoice financing companies, the calculation is simple. Businesses get roughly 85% of their invoice value in financing. Companies will get at least some portion of the remaining 15% back, with a small percentage taken as a financing fee by the lender.
Who can get accounts receivable financing?
Invoice financing is available to a wide range of business owners. If you have a business with a B2B model, then you will likely qualify for invoice financing. The one catch is that you must have accounts receivable outstanding. Since you are cashing in on that value, you'll need a handful of invoices outstanding.
With most forms of business lending, lenders care about the amount of time you have been in business and your business fundamentals. This isn't the case with invoice financing. They're using your invoices as the collateral for the loan, so they care more about your outstanding invoices.
How much can you get?
That really depends on not just the total amount of your invoices, but also the quality and value of the invoices. Like with most loans, your credit profile will also be important. The better your credit, the more money you can get.
Unfortunately, sometimes you won't qualify for a line of credit or business credit card. In these times, invoice financing can be a great way to bridge the gap between when you need the money (now!) and when you get paid.
Applying for invoice financing
It's not hard to fill out an application for accounts receivable financing. In some ways, your invoices will speak for themselves. Depending on the company you are applying with, you may be required to fill out more information. At any rate, the process will typically be quick and easy.
Invoice financing companies know that you don't have hours to spend on these applications. After all, you are trying to run a business. This is why most lenders will allow you to complete the application in a hurry. Some will even link up to your business's accounting software. This will make it quite easy for you to apply for the loan with only a click or two.
So how does this type of financing work?
It can be frustrating waiting for people to pay. Many customers just won't pay on time, and this can throw you off schedule, costing you opportunities. When delayed payments happen, your money will be tied up, making it hard for you to invest, buy more inventory and the like.
This is where invoice financing comes into play. Lenders get that money to you right away. Then they take a percentage out of your payments whenever they do come in. You get the money quickly so you can continue to grow your company.
Improving cash flow with invoice financing
The big dream for business owners is getting paid instantly on all invoices. This isn't realistic, but it can be a possibility with invoice financing. Invoice financing can be expensive at times, but it offers predictability.
You will know precisely how much cash flow you have, which allows you to plan for your own accounts payable. It means you won't have to burn your good business relationships by being late on your own payments.
Often, you will need to meet an important upcoming expense, like your payroll or quarterly taxes. Invoice financing gets the money to you right away. On top of that, you will feel much better about your company because of the peace of mind that comes with having that money.
Understanding the process
If you agree to the loan, you will give the lender a security interest in some of your business invoices. This means that if you give them a security interest in a $1,000 loan, then you will get around $850 for that. The remaining $150 would remain in reserve.
The lender would take some fees, with fewer fees happening depending on how long it takes the customer to pay off your invoice. Of the $150, or 15%, your lender will take a small fee as an up-front processing fee. The rest will be a so-called factoring fee, which is variable depending on how long the invoice remains outstanding.
When the invoice is finally paid, you will get whatever remains of that 15% after the lender takes its fee.
What about invoice factoring?
There is a different type of invoice financing that is out there today. This is invoice factoring. With invoice factoring, the lender is just buying the outright value of the accounts receivable from you. They will then go and collect the debt.
Some lenders do this because they think that they are more adept at collecting on debt than you. Likewise, they can squeeze more value out of this. It is still a good idea for businesses because they no longer have to worry about going after the payment.
The cost of accounts receivable financing
You might be wondering just how much this will cost. It can be expensive in some instances. You are paying for the benefit of having your cash now rather than later, and this can enhance your business's capability. It will come at some cost to you, however.
One example of how this might look is as follows. What if you have $50,000 tied up in an invoice with a 30-day payment term. The lender might give you $42,500, or around 85%. They will then hold the other seven thousand and change in reserve.
If your customer pays the invoice in three weeks, the lender will take out their 3% fee. They will then take a factoring fee of around 1% per week, which would amount to around 6% in total. The factoring fee is similar to the interest rate of a traditional business loan, it is just calculated a little differently.
The invoice finance company would then give you back the remaining 9% when the invoice is paid in full. Your invoice payments are coming to you eventually anyway. But you need cash now. So why not leverage these outstanding accounts to provide that much-needed cash today?
So when should a business consider invoice financing?
Maybe you think this percentage is too high just to get the money you were going to get anyway. There are some times, however, when this is valuable. If you need to meet payroll or make some critical purchase, it can be helpful. Your business may very well benefit from this kind of approach when something pressing is on the horizon.
If your credit score is keeping you from more traditional small business loans, then invoice financing might be right for you. Turn your unpaid invoices into working capital you can use today to grow your business.
This form of short-term financing might be more expensive than other forms of financing, especially upfront. However, depending on the creditworthiness of your customers, and the invoice amounts you are owed, you could have money in your bank account within a few business days.