Invoice Financing

Invoice Financing 101: What You Need to Know as a Small Business Owner

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Invoice financing helps small business owners and entrepreneurs with the capital needed to continue operations while waiting for outstanding invoices. Many companies suffer from cash flow issues, rather than a lack of clients, preventing them to seamlessly operate their business. You may need the help of invoice financing companies in the form of accounts receivable or receivable financing to meet your cash flow needs.

Main Takeaways

  • Allows a small business to use its unpaid and outstanding invoices as collateral for financing to fund operations
  • Short term financing is often quicker to obtain than traditional small business loans

What Is Invoice Financing?

Invoice financing is a type of financing that gives businesses money to hold them over while waiting for their clients to pay the invoice. It helps businesses improve cash flow to meet their financial obligations such as paying employees and contractors and purchasing supplies. Financing using invoices as collateral can solve issues related to clients taking a long time to pay their balances.

For example, you operate a freelance writing business with corporate clients who contract you for a series of articles. The agreement includes terms such as an invoice for $5,000 paid in 30 days. But what happens if you need that money within 15 days to pay your business expenses. In this situation, you can use credit cards or alternative financing options by collateralizing unpaid invoices. 

With invoice financing, a business owner pays a financing company a percentage–the fee– of the invoice amount. The business owner remains responsible for the collection of the unpaid invoice and repayment of the loan.

Who Is It Good For?

If you’re a small business that offers 30-, 60- or 90-day customer invoices and accounts receivable, you could face a cash flow issue while waiting for payment. Invoice financing can help with cash flow management. It can help you turn unpaid invoices into cash to pay for expenses.

If you have less than perfect credit and need an alternative to get the funds quickly. It’s a faster option compared to traditional credit lines offered by financial institutions. You certainly can use both methods of financing as part of your business cash flow management.

There are two types of business loans associated with invoices: financing and factoring. 

Difference Between Invoice Financing and Invoice Factoring

Invoice financing and invoice factoring are often used interchangeably but they are two different things.

With invoice factoring, you sell your invoices to another company–at a discount–for collection and repayment. The factoring company takes your unpaid invoice and will pay you in advance, collect the payment, and send the remaining invoice balance minus their fees back to you.

On the other side, invoice financing keeps you in control over your invoices. You continue to work directly with your customers and clients. You will get a portion of the entire amount minus any fees of the invoice amount. It’s a better option for businesses that want to maintain relationships with their clients directly.

Invoice factoring and financing are often provided by alternative lenders and take into account business credit history, personal credit history, time in business, credit score, and annual revenue to make a decision.

Here’s what else you need to know.

Does It Make Sense for Your Business?

Invoice financing is best for those who deal with other businesses (B2B) and corporate clients. You need to have invoices rather than direct payments like direct-to-consumer (B2C) businesses.

If you’re a business with unpaid invoices, invoice financing may be an easier method to get the funds needed on a short-term basis than through a traditional small business loan. Just keep in mind borrowing costs may not have the best interest rates and are more costly compared to traditional business financing options.

The biggest advantage is the relatively quick process when you’re in a cash crunch. It can help you meet your cash flow needs. It’s an alternative to a cash advance from credit cards or a traditional business loan.

However, there are some risks such as your customer not paying the invoice on time. You’ll be required to make repayment based on the terms. Although, some invoice financing companies offer extensions with additional costs.

How does Invoice Financing work

With both financing and factoring, the lenders often have a simplified application process and can make a decision within one business day. During the approval process, they will take into account your business operations, the length and time in business, outstanding invoices available, current accounts receivable, and your credit score.

Pros of Invoice Financing

  • Helps small businesses receive early payment of invoices
  • Stabilizes cash flow and provides flexibility as an advance payment for invoices
  • With the right lender, personal bad credit may not be an issue as they may determine the credit of your customer over your own
  • Fees can be minimal with the right provider

Cons of Invoice Financing

  • Compared to loans from a business bank the fees may be more or less then credit cards.
  • These types of invoice financing only solves immediate cash flow problems. You may need a better strategy for access to cash or other financing option to fix occurring cash flow issues.
  • An invoice finance provider may be factoring your invoice so know the details if you want to keep control and minimize fees.

Need Cash? Find Invoice Financing Loans

If you’ve determined invoice financing or factoring is a good option for you, check out our list of options below:

Kapitus offers small business loans through a wide range of financing options. Kapitus offers invoice factoring. To learn more click here.

There are things you want to know such as the reputation of the invoice finance company, years in business, the financing costs and service fee, and terms and conditions. Again, invoice financing is a short-term solution that can help you in a crunch but a more well-planned cash flow management system is necessary to keep your business going.

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