Invoice Financing

Get access to revolving funds when you need it most.

Matthew Gillman

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Loan Amounts

$25,000 – $5,000,000

Terms

Revolving Credit

Rates

6% – 18%

Speed

Less than 30 days

Table of Content

Invoice Financing

What is Invoice Financing

Invoice financing allows businesses to use unpaid invoices as collateral in exchange for upfront cash. Lenders typically give you 80% to 95% of the total invoice value upon approval. You’ll receive the remaining 5% to 20% (minus a small transaction fee) once your customers pay their dues.

The main benefit of invoice financing is that it frees up the cash tied to your outstanding invoices. With more capital available, you can cover day-to-day expenses, take in more customers and invest in growth opportunities.

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Types of Invoice Factoring

Step-By-Step Guide in Invoice Financing

The invoice financing process is a simple one that can be completed in a few steps. Here’s how it goes:

Step 1. Invoicing
You invoice your customers for the services rendered or products sold.

Step 2. You Sell Your Invoices to a Lender

You sell your invoices to your lender in exchange for working capital.

Step 3. The Lender Evaluates Your Application

After submitting your invoices, the lender will evaluate your business’ eligibility. They typically perform a background check on both the business and their customers. However, lenders are more concerned with your customers’ creditworthiness since they’re the ones repaying the invoices.

Step 4. Approval

The approval process for invoice financing is faster compared to other loan options. Generally, you can claim the cash at least 24 hours after the approval.

Step 5. Customers Pay Their Invoices

Your customers will directly pay their invoices to the lender you’re working with. This arrangement may vary, so be sure to check in with your lender.

Step 6. Payment

Once your customers have paid their invoices, the lenders will deduct the amount due to them. They will then send the remaining balance over to you, minus the fees.
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Benefits of Invoice Financing

What are the Benefits of Invoice Financing?

Flexibility
Invoice financing provides you with financial flexibility. You’ll be able to leverage pending invoices to free up needed cash to cover any short-term business expenses.
Immediate Cash Flow
Rather than waiting for 30 to 90 days for the invoice payments, you can finance your invoices and get cash immediately. You can use the funds to bridge cash flow gaps and maintain financial stability.
Easy Approval
Approval is quick and easy. Lenders do not focus much on your business history and credit rating as they’re more concerned with your customers’ creditworthiness. As long as you have creditworthy customers and invoices to finance, you’ll most likely qualify for invoice financing.
No Additional Collateral Needed
You don’t have to present additional collateral because invoices your are going to finance secures the loan.
Business’ Borrowing Capacity Grows with Business
Since your credit line relies on the value and quantity of the invoices you sell, the amount you receive for your invoices in the future also grows along with your company’s revenue.
Accept Bigger Projects
Big opportunities can come knocking at your door. With more available cash, you don’t have to think twice about accepting these projects. You’ll be able to focus more on acquiring more clients than chasing business debtors.
Manage Late Paying Customers
Invoice financing allows you to hand over their ledgers to the factoring company where the company then takes full control of it – including collecting and following up on payments. This lessens the need to use additional resources to collect customer dues.
Avoid Missed Payment Deadlines
Missed payments and late invoice payments can cripple a business. Being able to cash out your invoices earlier allows you to have the needed cash to pay for your business’ financial responsibilities. With invoice financing, you won’t have to worry about missed payment deadlines anymore.
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Businesses use Invoice Financing

Why Businesses use Invoice Financing

Small business owners enjoy the flexibility of invoice financing.

The flexibility of invoice loans allows you to use the money they obtained for a wide variety of purposes. There are no restrictions on where the money can go, giving you the benefit of using the additional working capital however they see fit.

By accelerating payments on invoices, there is an immediate influx of working capital. With more cash, you can cover their day-to-day expenses, purchase new inventory and materials, bridge the cash flow gaps, resolve tight cash flow from seasonality, and grow.

Day-to-day Operating Expenses

The most common use of invoice loans is to cover day to day expenses. One of the biggest struggles that business owners face is a shortage in their working capital. By selling their invoices, businesses can get the cash that wouldn’t have been available for another few weeks. With that, business owners can take advantage of the funds provided to keep up with the normal operating expenses.

Smart business owners create financing plans to make sure funds are coming in from multiple routes. Invoice finance is one option for business owners to increase working capital by taking advantage of their accounts receivables.

Purchase Inventory and Materials

More money means more opportunity to capitalize on good prices or stock up on inventory and other materials. With more available cash, you can easily buy materials in bulk and enjoy discounted prices. This ensures that your shelves are always full and you’ll be able to service as many customers as you can.

Bridge Cash Flow Gaps

One of the biggest reasons why business owners apply for invoice factoring is because they rely on the cash that is tied up on their clients’ invoices. They are constantly stuck in a cycle of rendering products or services and then, waiting for weeks to receive the money. For many businesses, they don’t have the luxury to wait for weeks for the payments. With invoice lending, you can receive immediate cash.

Resolve Tight Cash for Seasonal Businesses

Invoice financing is also a great financing option for seasonal businesses . Once they head off to the off-season, their sales usually dip, thus, affecting the stability of their cash flow. Invoice lending allows you to cash out the unpaid invoices and get through the slow season of your business.

Business Growth

Business owners often use invoice financing to add to their working capital. With more capital, you can acquire more clients, take on big projects, hire more employees, and expand your services. The more their business grows, the greater their borrowing capacity will be, as well.
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Industries Benefit

Industries That Benefit the Most from Invoice Financing

Invoice Financing Industries Benefit
Invoice financing is a good financing option for B2B industries since most invoice their customers and sell on terms. The most common and best industries that best benefits from invoice lending are the following:

  • Transportation and logistics
  • Wholesale and distribution
  • Staffing
  • Manufacturing
  • Technology
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Invoice Financing Rates

Invoice financing rates, structures, and requirements vary depending on the lending company. But as a general rule, the rate a business receives depends on the the following factors:

Type of industry the business is in

The value of the accounts receivables

The number of invoices sold

Repayment period of the invoices

The creditworthiness of the client’s customers

Typically, the financing company charges around 1 to 5 percent of the total value of the invoices financed. The volume of the invoices plays a big role in determining how much fees the financing companies will charge businesses. The larger the volume, the lower the fees will be.
Ineligible Invoices for Invoice Financing

Ineligible Invoices for Invoice Financing

Progress Billing happens when a big project cannot be completed unless a portion of the project has been paid. Construction companies usually do this type of invoice. However, financing companies may not accept these invoices as they typically require accounts receivables to be contingent-free.

Pre-Billing happens when a company bills its customers before the completion of a project. Unless the services are rendered or the goods are shipped to the customer, this type of invoice is not eligible for invoice financing.

Milestone Billing is a form of billing where the total amount of the invoice is billed over a set period and at multiple points along the process. When each milestone of the project is completed, the lender will issue a bill for each milestone that has been reached.

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Documents Required for Invoice Financing

The documents required for invoice financing varies from lender to lender, but generally, lenders often need you to submit the one or more of the following documents:

A/R Aging Report

P&L and Balance Sheet

Articles of Organization or Incorporation

Sample Customer Invoice

Completed Invoice Financing Application Sheet

Proof of Identity

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Trucking Business Loans Help You

Types of Invoice Factoring

Small business owners can typically choose from five different types of invoice factoring, but it’s important to note that each option works differently from the other. Knowing what the types are and how they work will helps you determine which option best fits your company’s current needs.

Invoice Factoring

Invoice factoring is the most common type of invoice factoring small businesses apply for. In this arrangement, the merchants (borrowing party) sell their outstanding invoices to factoring companies. The financing company then takes full control of the company’s invoices the does the payment collection. Once the customers pay the invoices, the financing company then deducts the cash advance plus the fees. Then, the remaining balance is sent back to the business.

One of the main advantages of invoice factoring is that you won’t have to deal with payment chasing. This is especially true in companies that don’t have enough resources to do the payment collection themselves.

Invoice Factoring also comes in two types: recourse and non-recourse factoring.

Recourse Factoring

Recourse Factoring is the most commonly used form of factoring. In this case, if your customers default on their invoices, you’ll be the one responsible for the payments. It is a common misconception that a business is not responsible for the invoice once it is sold, but if the invoice is not paid, the business must cover the money their customers owed.

Non-Recourse Factoring

In non-recourse factoring, the lending company assumes the full risk of the invoices. This means that if the invoices remain unpaid, the factoring company has to take the loss and shoulder the costs. Non-recourse factoring is best for companies that have strong financials and reliable customers.

Invoice Discounting

Invoice discounting is a form of invoice funding where the borrowing business retains full control of their invoices. Unlike factoring, the business handles the payment collection, so the customers won’t know that they’re working with a financing company. This, in turn, allows them to maintain a good relationship with their customers. Companies with strong financials and a reliable and consistent payment history usually qualify for invoice discounting.

Spot Factoring

In spot factoring, businesses sell only a single invoice to the financing company. It’s usually a one-time transaction and the lenders usually don’t expect to do repeat business with the borrowers in the future. Companies will typically use spot factoring for big orders that tie up necessary operating cash flow. It’s the perfect option for businesses that find themselves in need of an immediate financing solution.

Selective Invoice Financing

Selective invoice funding is a combination of invoice factoring and spot factoring. In this arrangement, you can choose one or more invoices to sell, the lenders then finance the accounts receivable. Selective invoice financing is a cheaper option than having all the company’s invoices financed. You’re also given the freedom to choose what invoices they can sell.
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FAQ About Invoice Financing

How do you qualify for invoice financing?

The main criteria considered used to determine if a business can qualify for invoice financing are the standing of their customers and the amount of time the invoices will be out for. Generally, the more reputable a business’s customers are, the more likely the business will be qualified to use invoice lending.

How long does the application process take for invoice financing?

The application process for invoice funding is not overly complex or time-consuming. A lender will confirm the outstanding invoices and the companies the business anticipates invoicing to in order to ensure the clients are in good standing.

How would you use invoice financing?

Businesses use invoice financing to get paid on outstanding invoices so they do not have to wait out long payment terms. A lender that specializes in invoice financing can provide a business with the capital they need to operate efficiently and avoid having to wait out long payment terms from clients. It is not uncommon for businesses to wait 30 – 90 days to be paid and invoice loans allows businesses to be paid immediately and accelerate cash flow.’

Is collateral required for invoice financing?

The collateral used for invoice lending is most often the open accounts receivable used to secure funding. Lenders provide a percentage of the open A/R to a business while the business waits on payments over the terms of invoices from their customers.

What are the different invoice financing options?

There are many different financing options to consider, and some of the common types of invoice financing include factoring, Invoice discounting, export factoring, and spot factoring.

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