Customers who pay for goods or services in advance are not found in every business. For example, some firms allow clients to pay their invoices for 30, 60, or even 90 days. While such flexible payment options may benefit customers, companies may experience short-term cash flow issues if they wait for too many customers to pay. As a result, many business owners turn to invoice financing to free up some working money when this happens.
What Is Invoice Financing?
Invoice financing is a loan based on the amount of money owed to you on your outstanding bills. Invoice finance lenders often do not loan the total amount of the invoices but rather a considerable percentage of their value, allowing business owners to keep their operations running until their customers pay their bills. B2B enterprises are more likely to adopt this funding strategy than organizations that deal with people.
What Is the Difference Between Invoice Financing and Invoice Factoring?
Invoice financing and invoice factoring are two methods of business finance that are comparable but not identical. Your unpaid invoices are sold at a discount to a third party, known as a factor in invoice factoring. The factor is then in charge of collecting payment from your clients. Once your clients have paid the factor, the factor will reimburse you for the difference between the amount they advanced you and the total value of the invoices, less a factoring fee.
If you choose invoice finance, your outstanding invoices are simply utilized as collateral for a loan. Your clients continue to pay you as usual, and you reimburse the financing business according to your agreed-upon timetable until the loan balance, plus any fees, is paid off.
Pros and Cons of Invoice Financing for Small Business
When it comes to invoice financing, the invoices themselves act as collateral therefore no other assets are required to secure the funding. This is especially useful for tiny businesses that don’t have a lot of assets.
Invoice finance is faster and easier to obtain than traditional business loans, so you can get some extra operating capital without dealing with lengthy applications or waiting a long time to find out if you’ve been approved. The approval process for invoice financing often takes a few days rather than weeks or months.
Invoice factoring is also a viable option for newer businesses and those with less-than-ideal credit scores, as lenders emphasize your invoices and customers rather than your credit score.
Although lenders rarely advance the full value of your outstanding bills, they frequently finance a significant portion of their worth, often as much as 80% or 90%.
Because invoice factoring is a form of short-term financing, interest rates are likely higher than on a longer-term business loan.
Financing may not be available for all types of bills. Moreover, lenders who provide it are usually only interested in financing invoices made to other businesses, not to people.
Applying for Invoice Financing
When you apply, you can expect to be asked to provide:
- The invoices you want to finance
- Past bank statements
- A copy of your driver’s license or other government-issued identification
- A voided business check
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