What is Invoice Financing?
Invoice Financing is the practice of borrowing money against an invoice that has not yet been paid. Are you a candidate for this kind of loan?
Many companies bill their customers with invoices due in 30-90 days. Particularly for B2B companies who sell in bulk, there’s no avoiding that time gap between a sale and a payment.
Are unpaid invoices eating into your cash flow? Here’s a way to leverage those invoices to get quick funding for your business expenses.
While billing flexibility may win you customers, it could cost you working capital when you need it most. Your accounts receivable might look pretty on a balance sheet, but where’s the cash you need to pay bills and invest in new opportunities?
If you’re a B2B company that can’t get or doesn’t need a traditional bank loan, consider invoice financing. You’ll get 85% or more of an outstanding invoice amount immediately, which you can pay back (with fees) gradually.
How Does Invoice Financing Work?
Invoice financing is a secured loan, backed by your accounts receivable. You’ll get a lump sum of cash upfront, based on the value of invoices being financed. Your lender may seek to limit risk by not advancing the full amount of the invoices, although this will often depend on the creditworthiness of your customers (more on this later).
In weekly installments, you’ll pay back the principal in addition to a small percentage of the invoice value. The term length will roughly correspond with how long it takes your customers to pay invoices, but this varies among lenders.
Invoice Financing vs. Invoice Factoring
Invoice Financing is not the same as Invoice Factoring.
It’s common for people to confuse Invoice Financing with Invoice Factoring, given their similar names and concepts. While they are both effective cash flow solutions, it’s important to note their core differences.
As mentioned, Invoice Financing is a loan that you pay back with interest. Invoice Factoring, on the other hand, occurs when a third party (the factor) purchases your invoices at a discount (learn more about Invoice Factoring here).
Because Invoice Financing is a loan and invoices are simply collateral, you still own the accounts receivable and are therefore responsible for collecting payment from customers. With Invoice Factoring, however, the factor collects the payment from your customer. This may present pros and cons for each, but for the purpose of understanding Invoice Financing, please remember that you would still be the company collecting payments on outstanding invoices.
Why Use Invoice Financing?
If you need to convert unpaid invoices into usable cash, invoice financing makes a lot of sense! Getting better rates on short-term loans usually requires collateral. But this can put you at risk of losing precious assets that are crucial to your business and livelihood.
With invoice financing, the collateral is money you haven’t even been paid yet. Obviously, you don’t want to lose money that’s owed to you. But even if your customers fail to pay invoices, you can pursue collection through legal means. Even in the worst-case scenario, you won’t lose property or vehicles.
Invoice financing also presents a rare opportunity for those with less-than-ideal credit scores. While lenders will want to see your credit score, they are far more concerned with the credit scores of your customers! Remember, since your invoices serve as collateral, lenders want to make sure they can seize them upon default. They can only do that if your customers pay!
Here are some pros and cons to using invoice financing:
Pros of Invoice Finance
Immediate funding rather than a 30-90 day waiting period for invoice payments.
Fast and easy approval process.
Straightforward pricing structure.
Qualification depends mainly on your customers’ credit scores, not yours!
Cons of Invoice Finance
Higher fees than traditional bank loans.
Fees may increase if customer delays payments.
Invoice Financing Rates, Cost and Terms
Repayment terms for invoice financing average around 12 weeks. However, this can vary according to the expected payment time of your customers. Some lenders will even extend the term to 1-2 years (although this could get expensive).
Weekly Interest Rate
Most lenders will advance you 85-100% of the value of your collateralized invoices. Expect to pay a processing fee of around 3% on the advance. Then you’ll pay around a 1% interest rate weekly, along with principle, until the loan is paid off. As mentioned, most lenders structure a repayment term of 12 weeks or more. However, early repayment can save you from paying interest for the entire duration.
While there is no minimum request amount for an invoice financing loan, lenders would prefer that you have a substantial accounts receivable ledger. Most of these loans are based on a group of unpaid invoices, not just individual ones.
Once you’re approved and set up with the lender, advances come very quickly, often within a day.
How to Apply and Qualify for Invoice Finance
In order to qualify, you’ll need to be a B2B with annual revenue of at least $100,000. Most lenders would like your credit score to be at least 600, but some will accept lower scores, especially if your customers have good credit.
The 1-page application for invoice financing should only take a few minutes. Be prepared to show some basic documents like a driver’s license, a voided business check, bank statements, and proof of credit score.
In addition, lenders will want to see your accounts receivable ledger, along with the actual invoices you plan to collateralize. Once lenders have all the relevant information on your business and your customers, they will quickly get back to you with the advance amount, fees and rates.
Still have questions about invoice financing? We’re here to help! Contact us today! And let’s discuss how invoice financing or other cash flow solutions can help your business thrive!