Every business struggles with income, but companies that process invoices struggle a lot more than most. Companies purchasing goods or services from B2B businesses have particular privileges that customers don’t. Namely, customers need to pay upfront to get the goods and services they need, but companies get extra time to pay for.
If you’re a business owner who uses invoices, waiting around for the B2B customers to hand out the dough could be a huge drag on your resources. And these days, companies are taking more than ever to do just that.
Fortunately, somebody solved the invoice problem in the past. Invoice financing (also known as accounts receivable financing or a/r financing) can help you turn your unpaid invoices into immediate working capital, either by selling your invoices or using them as collateral.
In yesteryear, certain forms of invoice financing, for example invoice factoring, have gotten a poor rap because of shady marketing tactics and restricting contracts. In addition, invoice financing is a broad and confusing category with many financing options. An upswing of online loans and their non-traditional financing options make being aware of what you’re getting yourself into even more difficult.
So let’s make it simpler. Here’s all you need to know before embarking on your pursuit to make use of invoice financing for your business.
We Recommend BlueVine For Invoice Financing
What Is Invoice Financing?
The idea behind invoice financing is relatively simple. You’ll receive money before your customers pay their outstanding invoices. Instead of getting payments from your customers, you’ll get your money from a lender almost immediately. This way you won’t have to hold out for the customers to pay, potentially allowing you to invest and grow your company faster.
However, invoice financing doesn’t come with no cost; you’ll usually have to pay fees or interest on what you borrow. Obviously, this situation isn't ideal. My own mail to stop a portion of their revenue. From the business standpoint, though, immediate access to revenue gives you the ability to put that capital to use paying employees, purchasing new materials, goods, equipment, advertising, or doing anything you have to grow your business.
Invoice Financing VS Factoring invoices: What’s The Difference?
When attempting to parse invoice financing, you might have encounter the term “invoice factoring“. These financial tools offer similar advantages; however, they're separated by a few key differences:
- Invoice factoring is a purchase agreement. You sell your invoices to a company. The corporation then typically collects your customers’ invoices for you.
- Invoice financing is a loan. You request funds by showing evidence of your customers’ invoices. Once you’ve collected your customers’ debts, you’ll repay the loan.
It’s important to note that financing usually offers greater flexibility since you can pick and choose which invoices is going to be financed. With factoring, it's easy to won’t obtain that option.
Additionally, you might have less privacy when going the factoring route. This is because customers will discover you’re working with a company when they’re contacted for payment. Financing, meanwhile, offers better privacy since your business will be the only one emailing customers.
How Invoice Financing Works
If you’ve selected invoice financing, you’ll have to take your invoices to some financial institution. Once you apply and offer your outstanding invoices for collateral, the organization determines if your clients are a worthy applicant for approval.
Assuming you’ve been approved, the lending company will help you to borrow a portion of your invoices’ value, typically 85% to 95%. The rest of the 5% to 15% sits in reserve.
Note that’ll you will need to pay for fees together with your loan. You may have to pay for processing fees, draw fees, maintenance fees, or bank wire fees.
You’ll then have to pay an every week percentage based on how long you take to pay. Lenders routinely charge around 1% per week, but actual costs vary wildly.
After you’ve paid off the borrowed funds, you’ll get the reserve back — minus any fees. The main difference is basically the cost you paid to access money faster versus just waiting for your customer (or customers) to repay.
Is Invoice Financing Right For Your company?
Invoice financing are needed because it gets money to your hands fast. Of course, like most loan-centered tools, things aren’t all sun and roses. Here’s a glance at a few of the major pro and cons to invoice financing:
Pros:
- Low Borrower Requirements: Because your outstanding invoices behave as collateral, lenders don’t care as much about other aspects of your company. This means you may still be eligible for a invoice financing even when your revenue, profitability, or chronilogical age of business are relatively weak. However, do note that some lenders consider credit reports, which means you should still attempt to maintain a healthy credit profile.
- Flexible: Invoice financing is much more flexible than factoring — you’ll have the ability to select which invoices get financed. Which means you won’t be asked to finance certain invoices when you don’t need to.
- Privacy: Because you’re usually responsible for collecting invoices from customers, the fact that you’re using a 3rd party for financing will be hidden. This really is as opposed to factoring, where customers will likely realize that a 3rd party is handling your invoices.
Cons:
- Fees: Invoice financing might have higher fees than other kinds of financing. Because fees and interest may imply that you will notice as little as 85% of your invoices, invoice financing shouldn’t be utilized without careful consideration of the business finances. If you’re considering factoring, observe that it comes with its very own set of costs.
- It Continues to be Financing: As invoice financing is technically financing, you’ll only want to do it if your business are able to afford repayments. In case your business isn’t profitable — or can’t afford upfront costs — you might like to consider factoring invoices instead.
- You Do The Invoice Collection: Because the action of financing your invoices is technically a loan, you will probably result in collecting debt out of your customers. Invoice factoring, however, puts the collecting take into account control of a third-party company.
Where To locate Invoice Financers
Thanks towards the digital world in which we now live, many awesome lending companies have considered the online space to promote their craft. Online lending is growing in an array of non-traditional financing methods in the last decade or so. Some of these new companies took on the task of updating invoice financing.
Online companies have made the invoice financing process easier in many various ways. Their application processes are completely web-based and you're simply in control over which invoices get financed. Plus, these businesses lack extra fees and frequently don’t require long-term contracts to be used of the services.
Aside from those characteristics, financing companies are so diverse that you’ll have to investigate them individually to decide which best fits your company. Listed here are ’s favorite invoice financing picks:
- For small businesses: Fundbox or BlueVine
- For large businesses: P2Binvestor
For those curious about looking into invoice factoring instead, we’ve done an overall total breakdown around the best factoring companies for smaller businesses.
Check Out BlueVine For Invoice Financing
Final Thoughts
At its core, invoice financing is a simple concept: it’s a way for businesses to smooth out income. The agreement doesn’t have to be complicated. When you’re looking for the best invoice financing partner, locate one that actually works on your terms. If you want to keep the arrangement discreet, find a funder willing to honor that. Should you only need to redeem an invoice occasionally, look for a funder that is more lenient.
If you discover that you’re needing to routinely finance invoices to maintain your business’s income, it may be worth looking at our article about key techniques for improving income.
If you don’t such as the sound of financing invoices, but nonetheless have to smooth out your money flow, you could consider getting a line of credit.
