Invoice financing for businesses that rely on accounts receivables

Turn your unpaid invoices into financial leverage you can use to grow your business. Borrow against the invoices you send to customers.

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Breaking ground as a new form of borrowing with reduced risk, invoice financing relies only on customer payments for success. Unlike other types of lending, you don’t have to secure your loan with an asset. You just need a steady stream of revenue that is backed up by invoices from your clients.

If you’re tired of waiting weeks or even months for invoices to be paid and need a more consistent source of working capital, invoice financing might be something to consider.

How does invoice financing work?

Invoice financing is when a lender gives you an advance on your pending invoices. Just submit your invoices to the lender, and you’ll receive the amount of the invoice minus a percentage as payment. When the client pays you, you pay back the lender.

What are the costs of invoice financing?

Most invoice funding companies will lend you a large percentage of the total value of your invoices. An advance fee may also be charged, usually between 2-5% of the invoice amount. The exact costs involved will depend on your business and the lender.

Check out our guide to business loan costs to find out what you can expect to pay when getting a regular business loan, and compare this with the cost of invoice financing so that you can determine which is the best option for you.

How to compare invoice financing providers

As with other types of lending and credit services, there are several points you can use to help select the best invoice financing provider for you. Here are a few things to consider before you decide which one may be right for your business:

  • Advance fees. These are typically charged at around 3% of each invoice. However, funding providers may increase this if they view your company as less financially secure, for example, if you have a poor credit rating.
  • Additional fees. Some providers will charge you exchange and transaction fees along with discount fees from early payment offers made to your clients.
  • Loan amount. Many invoice financing providers are set up to offer a personal, efficient service to small businesses. However, bigger companies may be better suited to a bank or service that can handle a larger quantity of invoices.
  • Repayment options. Make sure you know each provider’s policy on late repayments, just in case a client lets you down.
  • Specialized providers. Some invoice financing providers specialize in servicing specific industries. For example, trucking companies can use freight factoring to sell their invoices at a discount and get quick access to the money. As another example, some lenders may specialize in invoice financing for digital media businesses or advertising companies.

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Invoice financing vs. invoice factoring: what’s the difference?

If your business relies heavily on invoices, you may have heard the about invoice factoring as well as invoice financing. Here’s the difference between the two:

  • Invoice financing. Invoice financing is usually an ongoing relationship with a lender and business. Some lenders charge a monthly fee for you to submit invoices and borrow money against them on a regular basis. You may also be charged different amounts based on how long the period is between when you submit the invoice for borrowing against and when you repay the lender.
  • Invoice factoring. Invoice factoring is a process in which you sell your invoice to third-party. That third-party company pays you a percentage of the invoice and then collects money from your client directly. This is more of a one-off arrangement.

Benefits and drawbacks of invoice financing to consider

Pros

  • No repayments. Without the stress of ongoing repayments, you can focus your efforts elsewhere.
  • No more secured assets. Forget the constant anxiety that comes with securing property and personal possessions.
  • Plan your finances effectively. Because you know when the money will be in your account, you can make decisions on future expenses with more confidence.
  • A flexible service. Unlike a long-term loan, you can decide exactly how long you require the services of an invoice financing provider.

Cons

  • Less control over total funds. Unlike a loan, invoice financing doesn’t give you the same freedom to choose the exact amount you borrow since the loan is usually a set percentage of the invoice amount.
  • If clients don’t pay, it’s your problem. Invoice financing is meant to be repaid in the short term, usually within 1-3 months. Your loan could rack up hefty fees if your client takes longer to pay you.

What businesses could benefit from invoice financing?

Businesses that generate most of their revenue from invoices would benefit most from this type of financing. A few examples include:

  • Law firms
  • Architects
  • Trucking companies
  • Graphic designers
  • Wholesale distributors
  • Marketing and PR agencies
  • Consulting companies
  • Staffing agencies

Bottom line

Invoice financing can be a good way to get the money you need to scale your business or cover financial shortfalls – especially if you have a hard time qualifying for financing. However, you’re ultimately responsible for the cost of your loan, even if your clients refuse to pay what they owe. So, be careful not to borrow beyond what you can reasonably expect to collect.

If you’re still unsure about using invoice financing for your business funding needs, read our guide on business loans to find out about other borrowing options.

Frequently asked questions about invoice financing

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