Invoice financing allows your business to borrow money against outstanding unpaid invoices that you are provided to your customers. This type of business financing is considered a debt product that helps businesses handle cash flow gaps and pay for short-term expenses. Many businesses use invoice financing as an ongoing strategy to operate their business, essentially working with a finance company to advance the face value of an invoice which reduces the waiting time for a business to get paid.
There are two types of invoice funding options: Invoice financing and invoice factoring.
Both of these business financing products allow you to utilize your unpaid invoices to obtain funding for your businesses expansion or everyday cash flow needs.
Invoice financing and invoice factoring tend to be used by some as interchangeable terms, but the two products have differences in both how they work, how the invoices are collected, and how you qualify for the programs.
A table highlighting some of these differences is below.
Invoice financing allows you to borrow cash using your outstanding accounts receivable as collateral. A capital provider provides you a portion of your unpaid receivables in the structure of a line of credit or loan. Typically, the amount of cash upfront can be as high as 95% of the face value of your invoices.
For Example) If you have an invoice for $5,000 * 95% = $4,750 {This is the amount received by the invoice financing company}
After your customer pays your invoice, you'll repay the capital provider the amount loaned in addition to fees and interest. With invoice financing, your business is still required to collect the outstanding invoices owed by your customers.
Sometimes, the invoice financing business will coordinate with your accounts receivable database on the back end. When your client pays your invoice, the lender could automatically subtract its fee before passing on the balance to you.
Invoice factoring refers to selling your outstanding accounts receivable to a factoring company at a discount. The factoring company will send you a portion of the invoice amount upfront and then take over responsibility for collecting the full amount. Typically, the amount of cash upfront can be as high as 95% of your invoices.
Once the factoring company receives the full invoice amount from your client, they’ll send you the difference, subtracted by their fee. In contrast to the invoice financing structure, your customers will send their repayment straight to the factoring company rather than to you directly.
The amount of the factor fee depends on the factoring company, but usually it is between 1%-6% monthly. The factoring company may charge their fee daily, weekly, or monthly - depending on the type of terms you extend to your customers and how quickly they pay your their outstanding invoices with your business. Overall, the longer it takes for your customer to pay your invoice, the more expensive your fee will be.
There is a clear difference between invoice financing and invoice factoring. With factoring, you will effectively sell those unpaid invoices to the finance company instead. However, if you do this, you will not be responsible for collecting the payment from the customer as this job will now fall to the factoring company. The company will give you payment for those invoices upfront but will keep a percentage of the total as their fee.
Invoice factoring can be advantageous in some situations as it can alleviate the responsibility of chasing customers and going through the collection process. However, it’s important to remember that invoice factoring may affect your interaction with your customers. The customer will see that you are working with an invoice factoring company as they will receive the demand for payment from a different entity. They may think that your company is now in financial difficulty as you are having to reach out to a factoring company for assistan
Below is a list of pros for invoice financing.
Below is a list of cons for invoice financing.
Unpaid invoices can be an issue for any business. While you may be confident the cash from your accounts receivable will come at some point, long repayment terms and slow-paying clients could cause a major problem for your cash flow and your business.
Rather than wait weeks or months to receive the cash your customers owe you, you can get funding immediately via invoice financing or invoice factoring. Both options can work to benefit your cash flow gaps.
Invoice financing is better for companies that want to keep control over their invoices. If you have a good relationship with your clients and can get your outstanding invoices paid fast, then invoice financing can be a solid and affordable financing strategy.
On the other hand, invoice factoring is a better option for companies that don’t have an issue with giving up control of their accounts receivable and letting the factoring business receive payments from clients. It can be especially helpful for small companies that don’t have the bandwidth to follow up on invoices.
In addition, it is easier to qualify for factoring compared to financing for new companies and business owners who have bad credit since it focuses more on the credit profiles of your clients. That said, invoice factoring is likely to have more expensive fees.
It is simpler to get approval for invoice funding than most other types of business loans. Any small business with a business-to-business (B2B) model can qualify if it currently has outstanding invoices.
Many of the requirements to get approved will depend on the lender. That said, invoice financing companies will concentrate on the quality of your accounts receivable and your clients’ payment history.
Traditional loan guidelines may not come into play as much with invoice financing or factoring, but it’s probable Lenders will still look at traditional metrics like your credit score, the history of your business and annual revenue. Of course, the better your numbers look, the higher the chances are you’ll be approved with the most competitive rates and terms.
So long as your business fits the general criteria (you have enough outstanding invoices to warrant a minimum purchase amount $5,000 of invoices) for invoice financing, getting approved is much easier than other types of financing. When a lender evaluates whether or not to approve your business for financing, the focus is on the vendors who pay you opposed to your businesses revenues, credit or other factors. When a lender agrees to purchase or factor your receivables, they need to be certain that the customer who is responsible to pay your invoice is reliable and not a fly by night organization. Typically lenders are looking for well known payors, opposed to smaller unknown companies.
With Lendzero, applying for invoice financing is easy:
Step 1: Click on the Get Approved button above and answer a few basic questions about your business. We will inform you about your best options and how many exist (this will set your expectations).
Step 2: After this is complete, you will be asked to create a username and password to begin your electronic loan application. This process normally takes about 6 – 7 minutes (if you have all your documents easily accessible and ready).
To complete the loan application, here is what you will need to have handy:
It is very helpful to download all documents as PDF documents as you will upload these during the application process.
Step 3: Once the application process is complete, we will send you the completed loan application for you to review and sign. Once you have signed for your application, the process is complete. You have officially applied and started your journey to receiving pre-negotiated invoice financing offers. Your Lendzero funding specialist will reach out to you to guide you through the remaining steps of the process, and provide the necessary guidance and support needed with the goal of successfully obtaining the proper loan.
