Invoice Financing

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Loan Amounts

$25,000 – $5,000,000

Terms

Revolving Credit

Rates

6% – 18%

Speed

24 – 48 hours

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Benefits of working with SMB Compass

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Successful track record of supporting entrepreneurs
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Free consultations to discuss financing options
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Over $250 million delivered to 1,250+ businesses
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25+ years of business lending expertise
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Flexible and low cost options available

What is Invoice Financing?

Invoice Financing is one funding method used by businesses to accelerate cash flow by getting paid for outstanding invoices or accounts receivable immediately, rather than waiting 30, 60, or 90 days to be paid by clients. Invoice financing acts a lot like a line of credit – a lender will determine how much money to make available for a business based on the value of their invoices, then when the invoices are paid the balance goes down and when new invoices are created, the balance increases and the business can draw funds in order to take advantage of the money that is owed to the business from those invoices. The purpose of Invoice Financing is to bridge the gaps between a business’ accounts payable and accounts receivable, which not only helps with day-to-day expenses but helps business owners take on additional customers and grow their business.

One specific type of invoice financing, called invoice factoring, is especially popular among business owners. The difference between invoice financing and invoice factoring is that invoice factoring is a specific type of invoice financing where a factoring company purchases a businesses’ invoices and then takes on responsibility for completing the invoices. Instead of like other types of invoice financing, with factoring, the lender gives a business a percentage of the value of their invoices and then their clients will complete payment directly to the lender, and once the lender receives the rest of the funds, they will send the money back to the business, while keeping a fee. Unlike with factoring, other types of invoice financing give business owners more control over their invoices and allow them to communicate with their clients directly instead of having the factoring company interact with their customers.

There are different terms and fees that come with different Invoice Financing product options, the rates and details will differ by lender. The terms are determined based on the strength and credit of the applying business, but more importantly, for invoice financing, the strength and credit of the applying businesses’ customers will play a major role. For example, if a food vendor sells their goods to a restaurant that recently opened, the quality of the invoices with the new the restaurant wouldn’t be considered strong because there is more uncertainty about the strength of the restaurant’s business – there is no guarantee that they will be able to pay back the value of their invoices. If that same food vendor sells to Walmart and they have multiple years-long relationships, the quality of that invoice is considered very strong, as Walmart is a very reliable client for their contract customer relationships. The first example here would most likely result in higher rates and less competitive terms, whereas the second example would have Invoice Financing companies competing for the business!

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What are the different types of Invoice Financing?

Factoring Line of Credit

A factoring line of credit is a business line of credit that is secured by all of the invoices that a business has outstanding from their clients. With a factoring line of credit, invoices are paid directly to a lockbox, which is controlled by a factoring company. Business owners have the ability to sell all eligible invoices and receive funding the same day that they invoice their clients. The biggest benefit of invoice financing for business owners is that their businesses no longer have to wait for customers to pay out their invoices in order to take advantage of the money owed to them for their relationships with their clients; when using a factoring line of credit, business owners can tap into the money owed to them whenever they need to

Spot Factoring

Spot Factoring is when a business sells a single invoice to a factoring company, rather than creating an ongoing relationship with the factor. Unlike a factoring line of credit, spot factoring is usually an individual transaction, making it a perfect financing option for businesses that find themselves in a rare cash flow need. Companies will typically use spot factoring for big orders that tie up necessary operating cash flow.

Non-Notification Factoring

Traditional factoring programs require both notification and verification of invoices – which means all of a business’s clients will be notified that the payments for the invoices will be remitted to the lender instead of to the original business. Additionally, a borrower’s clients will have to verify that the invoices are legitimate and that the money is on the way. A non-notification factoring facility is when the factoring company does not notify the customers that they are purchasing invoices. In order to qualify for non-notification factoring, a business must have strong financials. Like a factoring line of credit, all invoices will have to be paid directly into a lockbox, which is controlled by the factoring company.

International Factoring

International factoring is similar to domestic factoring, except the buyer and seller of the goods are located in different countries. No different than domestic factoring, international factoring is based on the invoices created from the sale of goods or services. Although there are similarities, there are more parties involved in the transaction when it comes to international factoring. There is a seller, a buyer, an export factor, and an import factor.

Export Factoring

Export Factoring is a specific type of invoice factoring for invoices that a business owner has with foreign buyers. No different than traditional factoring arrangements, when goods and services are provided, a bank or factoring company will purchase the invoices. Factoring relies on credit for confidence that the receivables for export factoring facilities are secured, which means that business owners who apply for export factoring usually will have to demonstrate a strong credit history.

Invoice Discounting

Invoice Discounting is a form of invoice financing where cash control is maintained by the borrowing business itself. Unlike factoring, where cash management is handled by the factoring company, because of the strength of the relationships that the borrower has with their clients, with invoice discounting the borrower has more flexibility and power. Invoice discounting is for companies with strong financials and a good, reliable, and consistently paying diversified customer base.

Credit Card Factoring

Credit Card Factoring is for companies that accept a majority of their payments by credit card. With credit card factoring, a business will use future credit card sales as a form of repayment. For example, a credit card factoring company will take 10% of all credit card sales until they are repaid in full. If a business were to borrow $100,000 and they process $50,000 in credit card sales per month, the business might repay $5,000 per month until the loan is paid in full. With credit card factoring, applying businesses need to demonstrate consistent cash flow and sales in order for a lender to approve and secure funds.

Recourse Factoring

Recourse Factoring is the most commonly used form of factoring. With recourse factoring, if an invoice does not get paid, the borrowing company is responsible to buy back the invoice. 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 owed by their client.

Non-Recourse Factoring

On the surface, non-recourse factoring is a specific type of factoring in which the factoring company is assuming the risk if an invoice is never paid. If an invoice is not paid, the factoring company is responsible to collect on that invoice. Non-recourse factoring is for companies that have strong financials and well-paying, large, reliable customers. Non-recourse factoring usually protects against debtor bankruptcy, not just for an unpaid invoice

What are the Benefits of Invoice Financing?

Invoice financing provides business owners with some flexibility with their financing plans, as it allows businesses to take advantage of their accounts receivable or invoices immediately. The biggest benefit for business owners is the immediate cash flow increase that invoice financing provides. Instead of waiting for clients to complete their invoice payments, business owners can utilize those funds and bridge gaps in working capital by using invoice factoring.

Another benefit to invoice factoring is that the application and approval process is typically easier for a business to qualify for. There are a couple of reasons why factoring companies provide more flexibility than traditional lenders. First, invoice financing is most often followed with no additional collateral required to secure funds. Some business owners cannot qualify for traditional loans or other financing options because they do not have the necessary collateral or credit strength for a lender to provide the funds requested. Second, with most factoring lenders, it is easier to get approval for invoice financing compared to traditional loan options because the invoices are used to secure the funds. Factoring companies consider the value and strength of the invoices owed from accounts debtors as the most important underwriting factors. These two reasons make invoice financing a viable option for many business owners that do not have the additional assets necessary for asset-based lending or other types of funding products.

What type of collateral is used for Invoice Financing?

Typically, most lenders do not require additional collateral, as the value of the accounts receivable from the invoices will be used to secure the funds borrowed from a factoring company. The value of the accounts receivable from clients is assessed by the factoring company, who will then determine a percentage of the funds that can become available to the borrower immediately. This means that the only asset that matters for invoice financing is the value of the accounts receivable.

Accounts Receivable (A/R)

A/R, or accounts receivable, is money that is owed to a company after a sale has been made or services have been rendered to their clients. Unlike asset-based lending, the only asset a business can use for factoring is its accounts receivable. Invoice factoring is a good financing option for business owners because it allows them to take advantage of the money owed to their business to use capital immediately instead of waiting for their clients to pay their invoices. Whether bridging a gap in revenue or covering budget expenses and payroll during down seasons, invoice factoring is used by many business owners to increase their cash flow and cover their capital needs,

Typical advance rates for factoring with most lenders range from 70% to 95% of the face value of the invoices. It is important for business owners to do some research in order to find a lender that offers invoice financing and that will offer advantageous rates. For example, if the face value of an invoice is $100,000 – meaning that the borrowing business is owed $100,000 from their client – and the factoring advance rate is 85%, the factoring company would give the borrowing business $85,000 at the time of the invoice purchase. Once the invoice is paid in full, the remaining balance, less the factoring fee, will be remitted.

Why would a business use Invoice Financing?

The flexibility of Invoice Financing gives business owners the ability to use the money obtained for a wide variety of purposes. There are no restrictions on what the money can be used for, so it provides business owners the benefit of using the additional working capital as they see fit. By accelerating payments on invoices, there is an immediate influx of working capital. Some of the ways a business can use the money are: day-to-day expenses; purchasing new inventory and material; bridging the cash flow gap between A/R and A/P; tight cash flow from seasonality; and growth capital (the more a business sells the more they can borrow!

1. Day-to-day operating expenses

The most common use for funds from invoice financing is for normal day-to-day operating expenses. One of the biggest struggles that business owners face is working capital shortages, or managing expenses while maintaining cash flow to make quick business decisions or take advantage of growth opportunities. By receiving funds for money that would not have been paid out for weeks or months, businesses that take advantage of invoice financing are able to keep up with the normal operating expenses without having to worry about falling behind in cash flow. Smart business owners create financing plans to make sure there are funds coming in from multiple routes, and invoice financing provides one option for business owners to increase working capital and take advantage of their accounts receivable.

2. Purchasing new inventory and material

More money for a business means more opportunity to capitalize on good prices or stock up on inventory and other material that is needed for normal business operation costs. Whether there is a sale on material that is consistently needed or a business owner wants to prepare for an upcoming busy season, it is always a good idea to stay stocked on inventory and working materials. By using invoice factoring for additional cash flow, businesses are always able to keep the shelves stocked and will never run out of the material necessary to stay open.

3. Bridging the cash flow gap between A/P and A/R

One of the biggest reasons that business owners apply for invoice factoring programs are because they rely on invoices from their clients, and they are constantly stuck in a cycle of rendering products or services and then waiting for the due dates to receive the money. For many businesses, the time between payments can be a struggle and many business owners utilize invoice factoring to help bridge this cash flow gap between their accounts payable and accounts receivable. With invoice factoring, business owners can receive immediate cash and often times don’t even have to worry about the invoices, as the client pays the factoring company directly for the invoice by the due date.

4. Tight cash flow from seasonality

Another common purpose that business owners apply for invoice factoring for is tight cash flow because of the seasonal nature of their business. For example, if a business goes through up and down seasons, there is often a struggle to maintain working capital during off-seasons. Many business owners go under during off-seasons and have a hard time making it to the busy seasons because they run out of cash. If a seasonal business relies on invoices, they can use their accounts receivable immediately to provide an influx of cash and give their business a stronger chance to weather the storm and make it to the busy season, where cash flow will come in more steadily.

5. Growth capital – the more you sell, the more you can borrow!

Business owners often use invoice financing for additional growth capital. By taking advantage of accounts receivable to capitalize on growth opportunities, business owners can take on more customers or more clients and expand their business. The more their business grows, the more invoices and accounts receivable they will have in progress, and the more money their business will be able to borrow via invoice factoring.

What are the best industries for Invoice Financing?

In order to qualify for Invoice Financing, a business must be in an industry that sells to other businesses, or a B2B industry. The reason for this is because B2B industries invoice their customers and sell on terms, while B2C industries collect payment at the point of sale (POS). While invoice terms 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 that deposits are paid upfront, where a percentage is paid when the manufactured goods are shipped, and then the final invoice term is for 30 days after the products are received.

Not all businesses can utilize invoice factoring because not all businesses rely on invoices and accounts receivable to receive payment from their clients. Businesses that do not use invoices to receive payment will need to consider other financing options. The most common and best industries for taking advantage of Invoice Financing are; transportation and logistics, wholesale and distribution, temporary staffing, and manufacturing.

Transportation and Logistics

Transportation and logistics companies often use invoice factoring because these types of businesses often rely on invoices from their clients. For example, most trucking and logistics companies do not receive payments from their clients until sometime after the transaction is completed. For many business owners in the transportation and logistics fields, waiting until payment on invoices is completed is difficult, and business owners need funds to keep up with payroll, other normal business operating expenses, or even expensive purchases like additional vehicles. Invoice factoring provides these business owners flexibility because it provides an additional avenue for funding and allows them to take advantage of the money that is coming to their company immediately, without having to wait for payment from their clients.

Wholesale and Distribution

Invoice financing is especially beneficial for business owners in the wholesale and distribution fields because these types of businesses typically hold a lot of value from their existing invoices and accounts receivable. In addition to their inventory in the products on their shelves, with wholesale and distribution, there is constantly layover between filling orders and receiving payments from clients. Invoice financing allows these kinds of business owners to get cash for their accounts receivable immediately, allowing them to reinvest into their business and keep the necessary inventory to maintain operations.

Temporary Staffing

Another industry that typically involves billing clients and waiting for invoices to be paid is the temporary staffing industry. Most often, temporary staffing agencies do not receive payments until after the jobs are filled and the temporary workers filled the shifts and completed their duties. This means that temporary staffing businesses need to maintain the rest of their operating expenses while their workforce is on the job, relying on their clients to pay their invoices. Invoice factoring is a solution for many temporary staffing business owners, as it allows them to receive funds based on the value of the accounts receivable from their workforce that is currently putting in hours. Instead of waiting for their clients to pay them for those ongoing hours, temporary staffing agencies that utilize invoice financing can keep working capital on hand.

Manufacturing

The manufacturing industry is another sector where invoice factoring is extremely useful, as many manufacturing companies often experience a struggle bridging the gap in capital needs between producing goods and collecting payment once the goods are sold. As most manufacturing companies rely on invoices, many business owners in the manufacturing fields utilize invoice factoring to maintain a steady level of working capital despite the delay in receiving payment from their invoices with their clients. As a manufacturing business owner, it is important to keep up working capital to maintain the level of materials and inventory needed to keep up with clients’ needs, invoice factoring provides one route for these types of business owners to take advantage of their accounts receivable and maintain cash flow.

Factoring for Staffing Companies

Construction Factoring

Transportation Factoring

Freight Broker Factoring

Oilfield Service Factoring

Government Contract Factoring

Textiles and Apparel Invoice Factoring

Agriculture Factoring

Media Invoice Factoring

Factoring for Consulting Companies

Factoring for Manufacturing Companies

Supplier Factoring

Distributor Factoring

Factoring for Wholesalers

Healthcare Factoring

Janitorial Service Factoring

What are the typical Invoice Financing Rates?

There are a variety of different factoring companies, all of which have 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. For example, business owners can learn about who offers invoice financing, what is invoice financing, invoice financing startup programs, or learn about invoice financing vs. invoice factoring. One of the most important things to research about invoice financing from different lenders is the rates that they offer. Typically, rates for invoice financing can range from .5% to 3% per month. Below is a list of different factors that can affect the rate:

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The quality and size of your clients.
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Previous payment history with your clients
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The length of payment terms with your clients – 30, 60, or 90 days
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Your business credit score and vendor payment history
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The profitability of your business

Type of Ineligible Billing for Factoring

Progress Billing is a type of invoice that is issued to collect on a portion of a project that has been completed. Instead of waiting for the project to finish, with progress billing, business owners can receive working capital immediately. Because the full contract is not yet completed, this type of invoice is typically not considered by most factoring companies, but for businesses that are typically involved in long-standing projects, progress billing might be an option. Different lenders offer different products and terms for invoice factoring.

Pre-Billing occurs when an invoice is created before a project or service has been completed. Until the services are rendered or the goods have been shipped, the 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 time period, at multiple different points along the process. When each milestone of the project is completed, the lender will issue a bill for the milestone that has been reached.

Factoring Terms

Notification – When an invoice factoring company notifies the paying clients that the borrowing business has entered into a factoring arrangement – the clients will typically complete the payment directly to the factor, in this case.

Lockbox – A bank account created to collect invoice payments. This account is controlled by an invoice factoring company.

Advance Rate – Percentage of each invoice that a factoring company is willing to advance – this is how much of the value of an invoice that the borrowing business will receive immediately.

Concentration – Amount of invoices due from a single client or debtor.

Concentration Limit – Maximum dollar amount of invoices that a factoring company will advance against one debtor.

Debtor – The company that is purchasing the goods or services from a factoring client.

Factoring Fee – The fee charged by a factoring company to purchase a company’s invoices.

Notice of Assignment – A letter sent by a factoring company to debtors notifying them that invoices have been factored.

Recourse Factoring – When a business is liable for invoices that are not paid to a factor.

Non-Recourse Factoring – When a business is not liable for invoices that are not paid to a factor.

Reserve – Percentage of an invoice that is held by a factor when purchasing an invoice.

Verification – When a factoring company calls the debtors to verify invoices.

Bill of Lading – Binding document issued by a carrier that outlines the terms and goods being shipped.

Credit Insurance – Insurance policy issued by insurance companies to protect lenders from losses due to default.

What makes our team unique!

Our company specializes in invoice financing and is agnostic to the industry, geographic region, and age of your company. We spend the time to get to know you, your business, and share all of the information that we can about our company. Before making a decision, we make sure all of the details are explained, questions are answered, and act as a value-add partner for your business. With a dedicated lending specialist and multiple points of contact, you will always receive fast responses and top-notch customer service!

What is the Invoice Financing application process?

Applying for invoice financing is a simple process. The industry dictates what application documents are required, but to get a proposal, the only documents that are needed are a simple one-page application, a current A/R Aging Report, sample customer invoices, and P&L and Balance Sheets. The aging report outlines who your customers are, what terms they pay on, and if there is any customer concentration. After a proposal is signed, the remaining documents are required to verify company ownership, understand your contracts and payment terms, and to make sure that your business is financially stable. Once you are on board, the process to submit invoices and borrow money is simple! We confirm your invoice and advance payment within 24 hours.

What documents are needed to apply for Invoice Financing?

Although each industry has its nuances, the initial application package remains constant to receive a term sheet. The below list is necessary to process an invoice factoring application, but additional documents will be requested for closing;

  1. A/R Aging Report
  2. P&L and Balance Sheet
  3. Sample Customer Invoice
  4. Simple One-Page Application

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.

Learn About Your Financing Options