Everything You Need to Know About Invoice Financing

Unlike large companies that have sufficient capital, small and medium-sized businesses are often stone-broke, often due to outstanding payments. This is such a frustrating period for business owners, especially those who have to wait for two or three months before payment arrives. These long payment cycles can lead to serious cash flow constraints, causing several significant problems such as being unable to pay suppliers, skipped debt repayments, inventory shortfalls, paying staff wages late and even losing contracts. 

During such situations, business owners often consider business loans to bail them out. However, the time-consuming approval process, tons of paperwork, and strict requirements mean that finding a business loan to meet your financial needs at the right time is indeed an enormous task. This is where invoice financing comes into play. 

What is invoice financing?  

Also called invoice receivable financing or invoice discounting, is a type of assets-based funding solution that allows business owners to improve cash flow and working capital when having long invoice cycles. This is one of the fastest and easiest ways to get immediate access to cash without needing a loan. You don’t need to wait for invoice payment and can make repayments when the money comes in. 

The invoice serves as collateral, so you won’t have to worry about submitting real estate, inventory, blanket liens, or other costly forms of collateral. With invoice financing, you typically receive 80% to 90% of the invoice value upfront based on the risk profile of your business. However, depending on the lender, you can get up to 100% of the invoice value. 

Invoice financing Vs. invoice factoring 

There is a different kind of financing that falls under the realm of invoice financing called invoice factoring. The only difference between them is that invoice financing is confidential and factoring is not. Invoice factoring is a way to get working capital by selling your invoices to a third party (a factor or factoring company). It can be provided by independent finance providers, or by banks 

Features of invoice financing 

Security: In most cases, invoice financing doesn’t require personal guarantees, offering a layer of protection for your assets. The invoices act as collateral against money borrowed. 

Maturity: Enjoy a convenient repayment tenor tailored to your business needs. The flexibility allows you to manage your cash flow effectively, especially during periods of delayed customer payments. 

Interest: Your business can benefit from competitive interest rates typically ranging from 1.5% to 3% above the base rates in the market. This ensures that the cost of financing remains reasonable while providing necessary liquidity. 

Factor Fee transparency: The factor fee, approximately 3% plus a percentage per week outstanding, offers transparency in understanding the costs associated with the financing. This clarity aids businesses in making informed decisions. 

Swift funding process: You can experience hassle-free loans with a quick approval process that takes as little as 24 hours. This rapid funding turnaround ensures that your business can address immediate financial needs and seize opportunities without delay. 

Why you should consider invoice financing? 

With the frequent difficulty of obtaining bank loans, invoicing financing can prove to be one of the smartest funding options for your small and medium-sized business. It’s quick and convenient, providing a swift increase in cash flow. As invoicing financing provides predictable working capital in less time, it allows businesses to cover their various expenses promptly and use the additional cash to take advantage of more opportunities to help the business grow and profit. 

Fast access to funds: Invoice financing is your go-to ally when time is of the essence, ensuring you get the funds you need quickly. Ideal for seizing those time-sensitive opportunities that can propel your business forward. 

Budget-friendly fees: Say goodbye to hefty fees. With invoice financing, enjoy a cost-effective solution that lets you make the most of your funds without breaking the bank.  

Flexibility without strings: No need for long-term commitments. Embrace the flexibility of invoice financing, allowing your small business to navigate financial twists and turns without being tied down. 

Effortless approval: We get it – time is money. The straightforward approval process is designed with small businesses and their cash flow problem in mind, making it hassle-free and swift so you can focus on what matters most. 

Instant cash flow boost: Whether it’s covering day-to-day expenses or grabbing that growth opportunity, invoice financing ensures you’re ready for whatever comes your way. 

No collateral stress: No need to risk your prized possessions. Invoice financing is a friendlier option, requiring no collateral. It’s a low-risk, accessible solution tailored to the unique needs of small businesses. 

How can you apply for invoicing financing? 

Compare various small business financing options to get started with Invoice financing. Usually, the application process for invoice financing is pretty quick and simple.  

Qualification requirements 

Qualifying for invoice financing is notably simpler than traditional funding, thanks to its unique structure. If your business operates on a B2B model and currently holds account receivables, you’re likely eligible. The approval and loan amount, however, hinges on the quality of your invoices, which you should assess before applying, considering they act as collateral. To qualify, ensure your business meets the following conditions:  

Formal business structure: Your business should be formalized through a corporate structure such as a Corporation (Inc.), Limited Liability Company (LLC), or a similar alternative.  

Customer credit history: Customers must exhibit an excellent credit history, contributing to the overall credibility of your business. 

Minimum turnover: The business should have a minimum turnover of $50,000, showcasing a level of financial activity. 

Client diversity: Having both commercial and government clients enhances eligibility, showcasing a diversified and stable client base. 

Profit margins: Maintain profit margins above 10% to 15%, underlining the financial health and sustainability of your business. 

Bankruptcy status: The business should not have an ongoing bankruptcy, ensuring a stable financial standing. 

Issued invoices: Invoices should have already been issued, indicating a tangible financial transaction in progress. 

Company background: Maintain a neat and clean company background, portraying professionalism and reliability. 

While these factors significantly influence eligibility, it’s crucial to note that they are not the sole considerations in approval decisions. Depending on the lender, various other factors may come into play. Therefore, engaging in a discussion with your lender to understand specific requirements for your small business is vital for a successful financing arrangement. 

Documents you need before applying 

Before applying for a loan, ensure you have the necessary documentation ready. This typically includes a valid driver’s license for identification purposes, a voided business check for banking details, recent bank statements to provide insights into your financial history, your credit score to assess your creditworthiness, and details of any outstanding invoices. Having these documents in order streamlines the application process, allowing for a more efficient and informed evaluation of your loan request. 

How does invoice financing work? 

The process starts when you decide which invoice financing company or alternative lender to work with. Once you finalized the lender, you can start selling your outstanding invoices for working capital. After perfectly verifying the invoice, your business, and your customer, the lender lends you 80 to 90 percent of the invoice. The remaining 10 to 20 percent sits in reserve. 

From that 10 to 20 percent, your lenders might charge fees such as processing fees, draw fees, or maintenance fees. Once your customer eventually pays the invoice, the lender pays you the remainder of the invoice minus fees.  

How much does invoice financing cost to businesses?  

When it comes to invoice financing, the costs you’ll encounter depend entirely on the lender you choose to partner with. Your unique situation plays a significant role in determining the expenses involved. The lender considers factors like the number of invoices you want to release funds from, how many invoices you’re looking to finance, the value attached to each invoice, your industry and sector, the trustworthiness of your clients, and the size of your business. 

Since fees can differ from one lender to another, it’s wise to carefully review the terms before starting with the application process. Be on the lookout for potential charges like invoice processing fees, application fees, factor fees, Automated Clearing or Bank Wire fees, and monthly minimum fees. Understanding and comparing these fees across different lenders ensures that you make choices that align with the unique needs and dynamics of your business. 

Early termination fee 

Consider an early termination fee scenario in invoice financing. Suppose you issue a $5,000 invoice to your customer, and the lender promptly advances you 90% of that amount. In this case, you can access $4,500 immediately upon assigning the invoice to the lender. Post fees, assuming a 3% charge of $150, the lender withholds this amount, leaving an additional $350 at your disposal. So, it’s like having a little extra cushion after covering the fees—a practical way to understand how invoice financing works in real-world terms. 

The way ahead 

If high costs make you think twice about invoice financing, there’s a simpler way. Get your business payments right away with instant payments—no waiting around. And for a smart move, try Forwardly’s cash flow forecasting tool which forecasts cash flow up to 12 months, for free. Instant payments cost to receive is minimal, and getting started on Forwardly is absolutely free with no monthly subscription fee. So, keep it easy: skip the wait, get faster payments, and start using Forwardly today for a streamlined cash flow.  

Looking for more tips? Check out 5 Cash Flow Management Strategies to Start in 2024