Invoice financing, which is also referred to as accounts receivable financing lets business owners finance any outstanding invoices in their business. Companies that deal with invoice financing simply advance you cash and hold outstanding invoices, rather unpaid invoices as collateral. This, in turn, gives you the perfect opportunity to invest back into your business. In invoice financing, you have the opportunity to get an advance of up to 85% of your invoices value and then get the remaining 15% later on depending on the agreement between you and the invoice financing party.
However, there are other financing companies that can give you an advance of up to 100% the value of your unpaid invoices. Most repayments of the advance are set for when the customer or client clears their invoice payment. The most outstanding fact about invoice financing is that you can get the advance you request within a very short period of time. Most of the providers have you sorted within 24 hours.
Advantages of invoice financing for small businesses:
- You don’t need to wait until the invoice payment is done to obtain cash.
- Customer invoices are all you need as collateral.
- The advances your business gets highly rely on the invoiced business credit.
Disadvantages associated with invoice financing:
- The interest paid; or rather the service fee can be much higher as compared to traditional or typical financing.
- The fee charged also depends on the period of time before the invoice payment is done.
Who is eligible for invoice financing?
This is pretty simple. As long as a business is based on a business-to-business model and it does currently have pending receivables, you are eligible to apply for invoice financing.
Basically, the deal is;
- These financing providers are not keen on your time, profitability or revenue in your business.
- As a matter of fact, it is the invoices you provide that act as collateral of the loan requested. As long as all the invoices check out and make sense, the financing companies really don’t get into the details of your business.
- Generally, the maximum amount of loan that your business can qualify for is based on the total value of the invoices you provide. It is important that you also remember that your creditworthiness is also one of the key factors that determine the amount of money you can be loaned by the financing company.
- You also need to remember that there are some other invoice financing companies that also go through your credit report before giving you the advance.
As discussed above, invoice financing is a kind of loan from the lenders. From a technical point of view, this can be bolded as the main difference between invoice financing and invoice factoring. In this technique of funding small businesses, the business owner doesn’t receive an advance but actually sells outstanding invoices to a factoring company at a discount. In return, the company gives you the cash right away. Later on, the company comes and collects the cash from your clients or customers. The window before the factoring company collects the cash from your customers depends on the agreement set. However, typically this period ranges from 30 to 90 days.