Invoice Financing

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Invoice-Financing

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Table of Contents

    What is Invoice Financing

    Invoice financing (also known as accounts receivable financing) is one of the most popular small business loans that allow 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 accounts receivable 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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    Loan Amounts

    $25,000 – $5,000,000

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    Rates

    6% – 18%

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    Speed

    Less than 30 days

    Step-By-Step Guide in Invoice Financing

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

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    What are the Benefits of 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 influx of 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.

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    Industries That Benefit the Most from Invoice Financing

    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 small business receives depends on 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 a small business. The larger the volume, the lower the fees will be.

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    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 invoices to be contingent-free.

    Pre-Billing happens when a small business 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 vary from lender to lender, but generally, lenders will require small business owners to submit 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

    Types of Invoice Financing

    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.

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    FAQ

    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 allow 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.