Is Invoice Financing the Best Option for Your Business?

invoice financing

Not many people know about invoice financing, however, it is a proven and viable funding solution for small businesses. If your business relies on pending invoices, you don’t have to wait for weeks or months before getting paid. Invoice financing helps bridge cash flow gaps and provides business owners, such as yourself, with the funding you need. So, the question becomes, is invoice financing the ideal option for your business?

What is Invoice Financing?

Invoice financing allows business owners to sell their outstanding invoices to factoring companies at a discount. In return, factoring companies give you 80% to 90% of the total invoice value upfront. You then receive the remaining balance (minus a transaction fee) once your customers pay their invoices. This frees up funds you can use to pay monthly business expenses such as your rent, payroll, office supplies, as well as other daily operational expenses.

This means that you don’t have to wait for 30, 60, or 90 days to receive payment for your invoices. The factoring company you’re going to work with will also be in charge of collecting payments from your customers. Rather than following up on payments, you and your employees can focus on more important tasks.

Who Qualifies for an Invoice Financing?

This type of financing is best for small businesses without a huge cash reserve. It’s also beneficial for companies that don’t qualify for traditional loans due to low credit scores. This is because factoring companies are more concerned with your customers’ credit rating since they’re the ones paying the invoices. Lenders may ask you about your business credit rating, but this is more of due diligence rather than a requirement.

Unlike other types of loans, it’s easier for business owners to qualify for invoice financing. You don’t have to have a high credit rating or a minimum number of years in business. As long as you have invoices from credit-worthy customers, there’s a good chance that you’ll qualify for invoice financing.

Many industries, such as those below benefit from Invoice financing, including:

  • Staffing
  • Construction
  • Transportation
  • Oilfield Service
  • Government Contract
  • Textiles and Apparel
  • Agriculture
  • Media Invoice
  • Consulting Companies
  • Manufacturing
  • Healthcare
  • Janitorial
  • And more!

Two Reasons to NOT Consider Invoice Financing?

Invoice financing is a great financing solution for many business owners, but as mentioned, it’s not for everyone. Obviously, if you don’t have pending invoices, it isn’t an ideal solution for you. Here are other factors to consider:

1. Cost is an issue for your business.

Companies that struggle to make ends meet should not consider invoice financing because it’s more expensive than traditional loans. If cost is an issue for you, it’s better to apply for a business line of credit. Although the application process is more tedious, it’s usually more cost-effective than invoice financing.

2.  Your company values privacy.

With invoice financing, most factoring companies assume payment collection. This means your customers will be aware of the arrangement since they’re paying directly to the factoring company. This arrangement makes a lot of small business owners uncomfortable. They tend to worry that this payment arrangement may negatively affect their business relationships. Fortunately, online factoring companies or online lenders can offer more flexible options.

Is Invoice Financing the Right Option for You?

There are many benefits that come with invoice financing, and it’s a great alternative to traditional business loans, especially if you need fast cash. Depending on the lender you’re working with, you’ll most likely receive the money within 24 to 48 hours after your application has been approved. This immediate influx of cash allows you to cover unforeseen expenses without taking on additional debt because, technically, invoice financing is not a loan. It’s more like an advance of the money that’s already owed to you. However, you need to make sure you can repay the money your customers owe within the agreed terms. Otherwise, you might end up paying costly fees or paying the entire invoice yourself.

Before applying for invoice financing, or for any type of loan for that matter, it’s important to evaluate your company’s long-term needs and goals to determine if the loan is right for your business. More specifically, you need to check the following:

  • Your creditworthiness
  • Your customers’ creditworthiness (for invoice financing)
  • Why you need a loan
  • How much you need
  • Your finances and ability to repay the loan

Even though invoice financing is a viable financing solution, it’s definitely not for everyone. If it’s your first time applying for a loan or you need assistance in finding a loan, it’s best to consult a financial expert. They can help assess your company and recommend the right loan for you.

Ezra Cabrera
Ezra Neiel Cabrera has a bachelor’s degree in Business Administration with a major in Entrepreneurial Marketing. Over the last 3 years, she has been writing business-centric articles to help small business owners grow and expand. Ezra mainly writes for SMB Compass, but you can find some of her work in All Business, Small Biz Daily, LaunchHouse, Marketing2Business, and Clutch, among others. When she’s not writing, you’ll find her in bed eating cookies and binge-watching Netflix.

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