Table of Content
- Key Takeaway
- What is an Invoice Financing Calculator?
- Invoice Financing Terms to Familiarize
- How to Use Invoice Financing Calculators
- Example of Using Invoice Financing Calculator
- How Lenders Determine Your Rates
- Other Invoice Financing Fees to Consider
- Frequently Asked Questions (FAQs) About Invoice Financing
- Final Thoughts
➥ Invoice financing can be expensive. By using the invoice financing calculator, you’ll get an estimate of how much the funding will cost you, so you can determine whether it’s a feasible solution for your business or not.
➥ The most common terms you’ll likely encounter when dealing with invoice financing calculators include the advance rate, factor rate/fee, reserve amount, and payment term.
➥Lenders often look at different factors when determining your rates. These factors include your customers’ creditworthiness, net invoice term, diversity of your customer portfolio, invoice volume, and business industry.
➥ Aside from the factor fee, the invoice financing company may also charge additional fees for application, origination, check processing, and late payments.
Cash flow gaps due to unpaid customer invoices can sometimes be the main reason why many businesses fail to achieve growth. When most of their capital is tied up on their accounts receivables, it can be difficult to meet the operating expenses or take advantage of a business opportunity. If left unresolved, these cash flow gaps could eventually lead to a more serious consequence (i.e., business closure).
Fortunately, invoice financing is available for businesses dealing with cash flow issues because of unpaid customer invoices. Invoice financing allows you to borrow money against your customers’ accounts receivables. Once approved, you can get up to 95% of your invoices’ value financed. That way, you won’t have to deal with the usual wait for the invoices’ payments and address your business’ financial obligations on time.
But before you go on and apply for one, it’s imperative to know how much the financing would cost you. This is then where an invoice financing calculator comes in handy.
What is an Invoice Financing Calculator?
An invoice financing calculator helps businesses get a rough estimation of the potential costs of using invoice financing within seconds. You only have to put the numbers in and the computer will do the calculations for you.
Calculating the loan cost can come in handy if you’re comparing loan offers of the same type from different lenders. As a business owner, you’ll want to pick the option that will cost you less, as it will result in more significant savings for your company.
Of course, there are other factors to consider, such as the lender’s reputation and customer service. But the financing’s cost will ultimately be the number one consideration when deciding which loan offer to go for.
Invoice Financing Terms to Familiarize
If it’s your first time applying for invoice financing, you may get confused with the terms the lenders use in explaining the financing cost. With that, it would be helpful to understand what the terms mean first, so you’ll know what you will be paying for.
We’ve gone ahead and laid out the terms used to describe the cost below:
1. Advance rate
The advance rate refers to the percentage of your invoices’ value that the lender will extend if they decide to approve your application. The equivalent amount of this percentage will be the funding amount.
The advance rate could range anywhere from 80% to 95% of the total value of the invoices you’ll submit for financing. The final calculation of the advance rate will depend on several factors like your business industry, total invoice amount, invoice volume, and more.
2. Factor Fee
The factor rate, also called factor fee, is the amount you’ll pay for the invoice financing service. It’s like an interest rate. The difference is, interest rates accrue on the principal amount, and the amount you pay in interest will be reduced as you pay off your loan. Factor fees, on the other hand, are calculated based on the original amount. That said, your repayments will stay the same throughout the loan period.
Factor rates essentially serve as the lender’s compensation for taking on the risk of letting you borrow money. Lenders usually express it as a percentage or in decimal form. They usually charge around 1% to 4.5%. If the lender uses the decimal form in calculating the cost, the factor fee could range from 1.0 to 1.35 of the total invoice value financed.
3. Reserve Amount
As mentioned, the lender will advance you anywhere from 80% to 95% of the total value of your invoices. The invoice financing company will hold the remaining 5% to 20% until your customers pay their invoices. This is called the reserve amount. Once your customer settles their invoices, the reserve amount will be wired back to you (minus the additional financing fees).
4. Payment Term
The payment term refers to your outstanding invoices’ net terms. It could be 30, 60, or 90 days (or more in some cases). You can choose a daily or weekly payment structure depending on what you and the lender have agreed upon approval.
How to Use Invoice Financing Calculators
While it’s entirely possible to compute the costs by hand, the process can be complicated, especially if you’re not familiar with the factors that go into the calculation. With the invoice financing calculator, all you have to do is enter the figures, and it will automatically give you the results within seconds.
Here’s a breakdown of the steps in using the calculator:
Step 1. Decide on the amount you need and put that into the calculator.
Step 2. Next, estimate the factor fee. Lenders may charge a factor fee of 1% to 4.5% or 1 to 1.35 of the total value of the invoices. To get a rough estimation, try to evaluate your qualifications. Factors like your customer’s creditworthiness, payment term, customer portfolio diversity, invoice volume, and others will play a role in how lenders determine your factor rate (discussed later).
Step 3. Enter your usual net payment terms after entering your factor fee. Invoice financing companies usually require the invoices to have a payment term of at least 30 days or longer.
Step 4. Decide on the frequency of your repayments. Some lenders may require daily payments, while others may allow weekly payments.
Once you’ve entered the factors, the calculator will show you the computations. You will see how much you’ll have to pay each day or week (depending on your chosen frequency) and the reserve amount.
Example of Using Invoice Financing Calculator
To better understand how invoice financing works, let’s look at a simple example.
Say that you have $10,000 worth of capital tied up in your customers’ invoices, and you won’t get paid until 90 days later. However, your employees’ payroll will be due by the following week, and you have to pay your rent and electricity. Without cash on hand, you won’t be able to afford these expenses, with most of your capital tied up to your unpaid customer invoices. To avoid cash flow issues and late payments, you decide to apply for invoice financing.
The lender then offers you an advance rate of 85% at a factor fee of 1% each week the invoice remains outstanding. Using the invoice financing calculator, we will get:
Advance amount: $8,500 ($10,000 x 0.85)
Reserve amount: $1,500, which will be given back to the business once the customers settle their accounts. However, note that the lenders will still deduct the factor rate and other fees from your reserve amount.
Invoice factor rate/fee: $100/week ($10,000 x 0.01) x 12 = $1,200 at the end of the 90-day net term.
In that case, the reserve amount will be down to $300. Depending on the lender, they may also charge other fees (discussed later), further lowering the remaining amount returned to the business.
How Lenders Determine Your Rates
As mentioned in the previous section, the invoice financing rates you’ll qualify for will depend on several factors. If you want to estimate how much rate the lender would offer, looking at these factors will help. Moreover, understanding how rates are determined will also help you work on your qualification, so you’ll have better chances of qualifying for invoice financing with excellent terms.
That said, here are the factors that will contribute to how the lenders calculate your rates:
1. Customer’s Creditworthiness
Unlike other funding options, your business’ creditworthiness won’t be the primary deciding factor here. Since the repayments will depend on your customer’s repayment capabilities, the lenders will consider your customers’ creditworthiness when deciding on your eligibility.
That said, once you apply for invoice financing, the financing company will conduct a thorough background and credit check on your customers. The more creditworthy they are, the better your chances are at qualifying for excellent financing terms. Conversely, if your customers show a history of missed payments or payment defaults, you can expect the rates to lean on the higher side.
2. Invoice Net Term
In general, the shorter the net terms are, the more likely it is for the customers to settle their balances. With a lower risk of default, invoice financing companies will be more inclined to offer lower factor rates and higher advance rates.
3. Diversity of Customer Portfolio
Lenders prefer lending to businesses with a diverse customer portfolio, especially if they see that their sales are evenly distributed among them. That said, they’re more likely to qualify for invoice financing with better factor fees and advance rates than businesses with concentrated customer portfolios.
4. Invoice Volume
Businesses that process high-volume invoices may fare better when it comes to invoice financing. In general, the higher the volume is, the better their chances of getting lower factor rates and higher advance rates.
However, other financing companies may also offer excellent rates to businesses that finance fewer, but high-value invoices. This applies to invoice financing companies that insist on taking responsibility for collecting customer payments. That way, they won’t have to handle a lot of customers and exert as much effort when collecting payments.
5. Business Industry
As a business owner, you know that some industries are riskier than the others. Businesses such as restaurants, construction, agriculture, and other service-based companies are considered high-risk and are less likely to qualify for better rates. Low-risk industries include product-based businesses such as wholesale and retail businesses typically have better chances of getting lower factor rates and higher advance rates.
However, that is not to say that high-risk industries can’t qualify for better invoice financing terms. Many lenders that offer invoice financing specialize in lending to high-risk businesses such as the ones mentioned above. These lenders may offer lower factor rates and higher advance rates to high-risk borrowers.
Other Invoice Financing Fees to Consider
As mentioned, the lenders may also charge additional fees on top of the factor fee. Unfortunately, the invoice calculator doesn’t include these in the calculation. It only takes the factor fee into account.
That said, it’s important to know what these fees are so you’ll be aware of what you’ll be paying for. Although lenders may charge different fees for their invoice financing products, in general, you can expect to be charged for the following:
1. Application Fees
As the lenders perform a background check on your business, including your clients, they usually incur charges. While other lenders may forego this, others may pass the fees on to the borrowers. The application fee is then added to the total cost of the financing.
2. Origination Fees
The lenders may also charge an origination fee to cover the processing of the new invoice financing application, loan underwriting, and funding. The borrowers usually pay this fee upfront during the loan application process. This usually costs around 0.5% to 1% of the total funding amount.
3. Check Processing Fees
Check processing fees are basically the service charge associated with clearing a check from a bank. If a business prefers paying through checks, the lenders may pass on these charges to them.
4. Late payment fees
Once the invoice’s net terms are up and the customers still haven’t paid their invoices, the invoice financing company may also charge a late payment fee. Depending on the payment structure or schedule, they may charge a certain percentage for every week the invoice remains outstanding.
Frequently Asked Questions (FAQs) About Invoice Financing
Suppose you’ve already calculated your invoice financing costs using the calculator, and you find out that you can afford the repayments. Before moving forward with the application, it’s crucial to understand what invoice financing entails.
We’ve outlined the most frequently asked questions about the financing below. This should give you an idea of what you need to know about invoice financing to make a more informed decision.
1. How does invoice financing work?
As mentioned, invoice financing lets you free up the cash tied up in your customers’ unpaid receivables. In a way, it’s an advance on your business’ outstanding invoices, so you’ll have the cash flow you need to pay your staff, reorder inventory, and address your operating and overhead costs without having to wait for weeks for your customers to pay you.
Once approved, the lenders will advance the agreed-upon amount (80% to 95% of your invoices’ value), and you can start using the funds immediately. After your customers settle their invoices, you’ll have to pay the financing company back with the advanced amount plus the fees.
Note: Some lenders may insist on taking responsibility for the invoice’s payment chasing and collection. As such, they will be in direct contact with your customers, and your customers, in turn, will know that you’re using invoice financing, which can ultimately affect your relationship with your customers. Always be clear about the collection process before signing the deal with the invoice financing company.
2. What are the advantages and disadvantages of invoice financing?
The advantages of using invoice financing include:
- Better cash flow management
- It involves less paperwork than when you’re applying for a traditional bank loan
- Invoice financing is easier to qualify for
- Most invoice financing companies have fast approval time. In some cases, approval could be as quick as 24 hours after application.
- Businesses with bad credit can still get approved for the financing.
However, despite the attractive features of invoice financing, it does come with some downsides, such as:
- It can be expensive, especially if your business belongs in a high-risk industry or if your customers fail to pay their invoices on time.
- The lenders may require more frequent payments since it’s short-term financing.
- It’s only available for business-to-business (B2B) and business-to-government (B2G) businesses.
- If the lender takes charge of collecting payments, your customers could know that you’re using the services of an invoice financing company.
3. How can I apply for invoice financing?
When applying for invoice financing, or any loan in general, it’s always wise to shop for offers from different lenders. This way, you can compare the terms and choose the best and most affordable one based on your current situation.
Once you’ve picked the right lender, fill out their application form (some may offer online applications) and find out what requirements they need for the application. Although they will require fewer documents than banks, you’ll still have to submit the essentials.
In general, the financing company might ask you to prepare the following documents:
• Driver’s license
• Personal and business financial statements
• Balance sheets
• Credit report
• Sample customer invoice
• Accounts receivable aging report
After you’ve collected all that, submit it to the lender and wait for the approval. Some lenders may give you a decision within 24 hours, which could be convenient if you cash ASAP.
4. What are the primary considerations to be eligible for invoice financing?
Aside from your customer’s creditworthiness, almost all businesses with a B2B or B2G structure can qualify for invoice financing. As long as you can show the lenders that you have enough volume of outstanding invoices, you’ll get a chance to qualify for invoice financing.
Invoice financing can be an excellent financial resource if you’re in a cash crunch due to unpaid customer invoices. However, as with any business loan, calculating your costs is crucial before moving forward with your application. Invoice financing calculators offer an easy way to do that.
We recommend experimenting with different scenarios (i.e., different factor rates, advance amount, etc.) and calculate the costs using the calculator. This way, you’ll get a bigger picture of the potential costs and determine how it will affect your company’s bottom line.