Invoice Financing

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How much are you looking for?

Loan Amounts

$25,000 – $5,000,000

Terms

Revolving Credit

Rates

6% – 18%

Speed

24 – 48 hours

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What is Invoice Financing?

Invoice Financing is a funding method many businesses use to accelerate cash flow. Instead of waiting for 30 to 90 days for the payment, merchants sell their accounts receivable to a financing company and get their cash up-front. The company then takes charge of the ledgers. Depending on the agreement the financing company and lender agree to, the financing company can either take charge of payment collection or leave it to the borrowing business.

For instance, a person runs a hardware business, and a few construction companies order materials in bulk. They sign a contract allowing the buyers to pay their balance, say $10,000, within 30 or 90 days. The problem is, the company has to pay its business dues in 15 days. Since you’re $10,000 short on cash, you’ll find it harder to fulfill your payment obligations. In this situation, the company can sell its outstanding accounts receivable to invoice financing companies.

The main benefit of invoice factoring is that it frees up cash that is tied up to the business’ outstanding invoices. With more cash available, the business can cover its day-to-day expenses. At the same time, they can take in more customers and invest in more opportunities. With that, growth and expansion become easily attainable for the company.

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Types of Invoice Factoring

Small business owners can choose from five different types of invoice factoring. It’s important to note that each works differently. Knowing what the types are and how they work will helps the entrepreneurs determine which option best fits their 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 the businesses 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. With recourse factoring, in cases where the invoices aren’t paid, the business becomes 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 for companies that have strong financials and reliable customers.

Invoice Discounting

Invoice discounting is a form of invoice financing 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 financing is a combination of two types of financing: invoice factoring and spot factoring. In this arrangement, the businesses 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. Businesses are also given the freedom to choose what invoices they can sell.

What are the Benefits of Invoice Financing?

There are a lot of reasons that compel business owners to seek the help of an invoice financing company. By selling their invoices, businesses can get up to 95% of the total of their invoices funded. Aside from that, there are a lot of other reasons that make invoice financing a better option than other financing options. 

Flexibility

Invoice financing provides business owners with some flexibility. It allows businesses to take advantage of their accounts receivable 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, business owners can sell their invoices and get cash immediately. They can then utilize the funds to bridge the gaps in their cash flow, thus maintaining its stability.

Easy Approval

With invoice financing, approval will come easy, too. Since the lenders don’t focus much on the borrower’s credit score, even businesses with poor credit can qualify.
No Additional Collateral Needed

Technically, invoice financing is not a loan. Since the invoices are sold to lenders, businesses do not owe anything to the financing company. Since there’s no loan to guarantee, there’s no need to present additional collateral.

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. With invoice financing, you can potentially get more compared to when you apply for traditional business loans.

Accept Bigger Projects

Big opportunities can come knocking at a company’s door and with more available cash, businesses won’t have to think twice about accepting these projects. With invoice financing, they can focus more on acquiring more clients than chasing business debtors.

Manage Late Paying Customers

Invoice factoring allows businesses to surrender all their ledgers to the factoring company where the company then takes full control of it – including payment chasing. This lessens the need for the business to use additional resources to collect their customer’s dues.

Avoid Missed Payment Deadlines

Missed 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.

Collateral Used in Invoice Financing

Typically, most lenders do not require additional collateral for invoice financing. The accounts receivables are usually used to secure the funds advanced from the financing company. The lenders will assess the accounts receivable and determine the percentage of the funds they can grant. In short, the only asset need in invoice financing is the company’s outstanding customer’s invoices.

Once approved, the funds will be made available to the businesses immediately.

What Are Accounts Receivable (A/R)?

Accounts receivable (A/R), also called invoice, is the amount that a customer owes to a business after a sale or service has been rendered. The company then collects the balance within a specific period – usually 30 to 90 days – depending on the agreement between the business and its clients. The amount owed is then recorded in the company’s general Accounts Receivable ledger.

In invoice financing, the only asset that businesses can use to secure the funding is their accounts receivables. It’s a great option if the business is looking for immediate cash. They can have access to additional working capital immediately instead of waiting for their clients to pay their invoices.

Why Businesses use Invoice Financing

The flexibility of invoice financing allows the business owners to use the money they obtained for a wide variety of purposes. There are no restrictions on where the money can go, giving business owners 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, the business 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.

1. Day-to-day Operating Expenses

The most common use of invoice financing 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 financing is one option for business owners to increase working capital by taking advantage of their accounts receivables.

2. 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, the business can buy materials in bulk and enjoy discounted prices. Through invoice factoring, businesses can make sure that their shelves are always full. They won’t have to worry about running out of materials and missing big opportunities.

3. Bridge Cash Flow Gaps

One of the biggest reasons why business owners apply for invoice factoring programs 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 financing, business owners can receive immediate cash.

4. Resolve Tight Cash Flor for Seasonal Businesses

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

5. 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.

What Industries Benefit Most from Invoice Financing?

To qualify for invoice financing, a company must do business with other businesses. In other words, it’s a good financing option for B2B industries.

B2B industries invoice their customers and sell on terms, while B2C industries collect payment at the point of sale (POS). While invoice terms may vary, there are common, or standard terms that are offered in each industry. For example, the average terms in the transportation industry range from 15 to 30 days. In manufacturing, it is common for business owners to ask for a deposit upfront. The customer pays a percentage of the total amount when the manufactured goods are shipped. The remaining balance can be paid within 30 or more days after the products arrive.

Not all businesses can utilize invoice factoring. Businesses that do not use invoices to receive payment will need to consider other financing options. The most common and best industries that best benefits from invoice financing are transportation and logistics, wholesale and distribution, temporary staffing, and manufacturing.

Transportation and Logistics

Transportation and logistics companies often use invoice factoring since it could take a while for their clients to pay them. Most trucking and logistics companies do not receive payments from their clients until sometime after the transaction is completed. They often don’t have the luxury to wait until their clients pay them because, they, too, have payables.

Invoice factoring offers flexibility to a transportation and logistics company as it provides an additional avenue for funding. By selling their invoices, they can have the cash immediately which eliminates the need for them to wait for their clients’ payments.

Wholesale and Distribution

Invoice financing is especially beneficial for business owners in the wholesale and distribution fields. These businesses typically hold a lot of value from their existing invoices. In addition to their inventory, with wholesale and distribution, there is a constant layover between filling orders and receiving payments from clients. Invoice financing allows these kinds of businesses to use their accounts receivables to receive payments earlier. This, then, helps them reinvest the money in their business and maintain the right inventory levels, and continue their daily business operation.

Temporary Staffing

Another industry that typically involves billing clients and waiting for invoices to be paid is temporary staffing businesses. Most often, temporary staffing agencies do not receive payments until after the jobs are filled and the temporary workers have completed their duties. This means that temporary staffing businesses need to maintain the rest of their operating expenses in the meantime.

Invoice factoring is a solution for many temporary staffing business owners. It allows them to receive funds based on the value of their client’s accounts receivable. Instead of waiting for their clients to pay them for those ongoing hours, temporary staffing agencies that utilize invoice financing can maintain enough working capital and stabilize their cash flow.

Manufacturing

The manufacturing industry is another sector where invoice factoring is extremely useful. A lot of manufacturing companies often struggle in bridging the gap between capital needs for producing goods and collecting payment after sale. Since manufacturing companies have a lot of unpaid invoices, they find invoice financing useful in maintaining enough working capital for their business.

As a manufacturing business owner, it is important to keep up working capital to maintain the appropriate amount of materials and inventory. This way, you can supply the clients’ needs and avoid losing projects. Invoice factoring provides a way for these types of business owners to take advantage of their accounts receivable to maintain steady cash flow.

Invoice Financing Rates

A lot of financing companies offer invoice financing with each having different structures, credit criteria, and rates. One benefit is that there are a ton of resources available online to find out information about invoice financing.

Invoice financing companies often agree to fund up to 95% of the business’ total invoice amount. Of course, the eligibility of a business would depend on the creditworthiness of its customers. So, before applying, a company has to make sure that their customers have a good credit rating.

Aside from that, fees are also charged at every transaction. But, the rates are very reasonable. The rates for invoice financing usually depends on a lot of factors, including

  • 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

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.

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

The businesses create an invoice for the services rendered or products sold.

Step 2. The Business Sells its Invoice to the Invoice Financing Company

With the business short in cash, they have to free up some cash tied up to their invoices. With that, the businesses apply for invoice financing.

Step 3. The Financing Company Evaluates the Application

Once the entrepreneurs submit their application, the lending company then evaluates the business’ eligibility. The majority of the financing companies perform a background check on both the business and their customers. Since the merchant’s creditworthiness plays a big role here, this is an important step that financing companies can’t afford to overlook.

Step 4. Approval

The approval process for invoice financing is relatively fast compared to other financing options. Depending on the factors, the business could get up to 80 to 95 percent of the total value of their invoices. The entrepreneurs can then claim the cash at least 24 hours after the approval.

Step 5. Customers Pay Their Invoices

Depending on the arrangement, the financing company can collect the payments or the business can do it themselves.

Step 6. Payment

Once payment is complete, the lenders will then deduct the amount the business got from selling their invoices plus the fees. The remaining balance then is sent back to the business.

What Documents are Needed

Different financing companies will require their applicants to submit different types of paperwork. But in general, an invoice financing company will need you to submit the following:

  1. A/R Aging Report
  2. P&L and Balance Sheet
  3. Articles of Organization or Incorporation
  4. Sample Customer Invoice
  5. Completed Invoice Financing Application Sheet
  6. Proof of Identity

Why Work With SMB Compass?

SMB Compass specializes in a lot of financing plans, including invoice financing. We provide financial services to every business no matter the industry, geographic region, or the company’s age. We spend most of the time getting to know our clients, their business and share all of the information and knowledge we have to help entrepreneurs arrive at the best decision.

Before moving forward, we make sure that our clients’ questions are answered and they understand the details of each of the financing options available to them. With a dedicated lending specialist and multiple points of contact, our clients are assured of only the best responses and top-notch customer service.

FAQ About Invoice Financing

What is invoice financing?

Invoice financing allows business owners to expedite the payments of invoices and get paid immediately rather than waiting 30-90 days for payment terms. This allows businesses to accelerate cash flow between their accounts payable and accounts receivable.

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 financing.

How long does the application process take for invoice financing?

The application process for invoice financing 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 financing allows businesses to be paid immediately and accelerate cash flow.’

Is collateral required for invoice financing?

The collateral used for invoice financing 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 in regard to invoice financing. Some of the common types of invoice financing include factoring, Invoice discounting, export factoring, and spot factoring.

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