Invoice Financing: Funding for Businesses with Bad Credit

Last Updated Jul 1, 2020 | Published on Aug 27, 2019 | Invoice Financing

It’s a well-known fact that small businesses have a hard time qualifying for loans, especially from banks. But for businesses with bad credit, securing a business loan can be even more difficult. This makes it even more challenging for them to scale their business for growth.  When traditional lenders turn you down, you can apply for a funding solution that favors businesses with bad credit. That is invoice financing.

Related: 5 Different Types of Invoice Financing

The Perfect Financing Option for Businesses with Bad Credit

Invoice financing is the process of selling your outstanding invoices to a factoring company at a discount. This type of funding solution is a viable option for small businesses needing cash flow but don’t qualify for traditional loans.

Unlike conventional funding solutions, you receive the funds based on the creditworthiness of your customers, rather than your personal or business credit rating. The factoring company runs a credit check on your customers to determine whether you can factor your invoices or not. If your customers have good credit scores, factoring companies will most likely approve your transaction.

Once the approval process is done, you can claim the money you borrowed and use it according to your business needs. The factoring company will then work to collect the payments from customers when their invoices are due. However, you can also apply for an invoice financing where you can do the payment collection and pay the lender after you collect payments. Large enterprises usually prefer the latter.

The Benefits of Invoice Financing

Some of the benefits of this type of financing include:

    • Improved Credit Rating: The funds from invoice financing allow you to pay your bills, taxes, etc. on time, which can improve your credit rating.
    • New Opportunities: By freeing up the cash flow tied to your invoices, you’ll be able to seize growth opportunities that come your way.
    • Boost in Cash Flow and Working Capital: You don’t have to wait for months before your customers pay their invoices. Invoice financing gives you money upfront once you’ve sold your invoices to them.
    • Alternative to Business Loans: Many lenders don’t lend money to small- to medium-sized businesses, and especially to startup companies. Invoice financing offers business owners the working capital you need for daily operations.
    • Not a Loan: Invoice financing is not a loan, so it doesn’t contribute to the debt level found on your balance sheet. This means that invoice factoring won’t affect critical financial ratios.

Related: 5 Common Cash Flow Problems That Invoice Factoring Can Solve

Financing Your Invoices Even with Bad Credit

As mentioned, financing your invoices is the process of selling pending invoices from creditworthy customers to a factoring company. The factor gives you 80% to 90% of the total invoice value upfront. Once your customers pay their invoices, the factoring company will give you the remaining balance minus a small fee. Instead of waiting for 30, 60, or 90 days for invoice payments, invoice financing immediately provides you with working capital.

Unlike traditional loans, you can qualify for invoice factoring even with bad credit because factoring companies are more concerned with your customers’ creditworthiness than yours. You can even factor your invoices after your company filed for bankruptcy protection.

If your company has a bad credit history, you can use invoice financing to fix it. This is one of the benefits of this financing. Since they don’t look at your credit score, you can easily qualify. Once you’re approved, you can use the funds for your business operations or pay off remaining debt which will improve your credit standing. You can then pick the arrangement where the financing company collects the payments from customers so you won’t miss the payment deadline.

Moreover, working with invoice financing companies also helps you avoid working with customers with a bad credit history. The company can conduct credit background checks on your customers to make sure that they have good credit standing. This benefits them, too, since they will be facing a big risk in this arrangement.

Invoice Financing for Small Business Owners

Invoice financing is one of the most affordable funding solutions for businesses with bad credit. You don’t have to wait for months for invoice payments. You can sell your invoices, instead, and get at least 80% of the total of your invoices upfront. This benefits your business in a lot of ways because the extra injection of cash can help add to your working capital. So, you’ll have enough money to pay for business costs and investments.

Moreover, you can also choose between invoice factoring and discounting. The difference between the two is that in factoring, you’ll have to give all your ledgers to the factoring company. Discounting, on the other hand, lets you take full control of your company’s ledgers. The company also does the payment collection in invoice factoring, while you’ll be in charge of payments in invoice discounting.

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