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Invoice Financing

  • Invoice financing is when a company borrows money by using its unpaid invoices as security.
  • Invoice financing can be used by a business to increase cash flow for operating purposes or to accelerate development and investment goals.
  • Invoice financing is often handled in a way that customers of the borrowing company are unaware of the arrangement, or it can be expressly managed by the lender.

Invoice factoring and invoice financing allow companies to take out a short-term loan against unpaid invoices.

It allows businesses to pay staff and suppliers, improve cash flow, and even reinvest in the business without waiting for customers to pay their bills in full.

As unpaid invoices are used as collateral, companies pay the lender a certain part of the invoice amount as a fee for taking out the loan.

With invoice financing businesses can overcome the challenges that come with slow-paying customers and struggles to acquire other types of business loans.

How Invoice Financing Works

When a company sells services or goods to a large customer, such as a wholesaler or retailer, it is usually on credit. It means the buyer is not required to pay for purchased goods right away.

The customer is issued an invoice reflecting the total owed amount as well as the due date of the bill. When a business offers credit to its customers, it can tie up capital that a company could have used to invest or expand its operations.

Businesses may choose to finance their invoices in order to finance outstanding accounts receivable or to support short-term liquidity needs.

Invoice finance is a type of short-term financing provided by a lender to the customers of the company in exchange for outstanding bills.

A business sells its accounts receivable to increase its available cash flow and working capital, which provides the company with quick funds for business expenses.

What Is Invoice Factoring?

There are many ways to structure invoice financing, the most prevalent of which being factoring and discounting.

Through invoice factoring for small business, a business can sell its outstanding (unpaid) invoices to the lender, and in turn, the lender may pay the company around 70% to 80% of the invoices’ eventual value upfront.

If the lender is paid in full for the invoices, it will send the 20% to 30% that remains to the business, which will need to pay fees and/or interest for the loan.

Customers will often be informed of this agreement because the lender receives payments from them, which may reflect adversely on the company.

Note: With a typical APR of around 15-35%, business invoice finance has a higher interest rate than traditional bank loans but it offers a good short-term solution if most of your short-term assets are tied to accounts receivable.

A company may also use invoice discounting; this is similar to the option of invoice factoring, but in this case, invoice factoring companies collect payments from customers rather than the lender, which means that customers will not know about this agreement.

With invoice discounting, a business can get a loan from a lender up to about 95% of the outstanding invoice amount. As soon as the company’s customers pay their invoices, the company can repay the loan, with interest and fees.

Invoice Funding vs Invoice Factoring

Invoice FundingInvoice Factoring
Borrowing money against your outstanding accounts receivables.Factor purchases the accounts receivables from you.
You retain full control of collections.The factoring company takes over collections.
When you collect payments you repay the lending company, plus fees.When the full amount is collected you are paid the difference.

How Invoice Financing Benefits Lenders

Invoice financing benefits lenders because, unlike offering a line of credit, which may be unsecured and provide the lender with little recourse if the business fails to return what it borrows, invoices serve as security for invoice financing.

The lender also reduces its risk by not granting full invoice loans to the borrowing company. Yet, invoice funding does not eliminate all risks because the customer may never pay the invoice.

This would need a time-consuming and costly collection process involving both the bank and the company receiving invoice financing from the bank.

Applying for Business Invoice Finance

Applying for invoice financing, invoice loans for small businesses, or invoice funding, is relatively simple and uncomplicated, compared to other small business finance options.

Tip: If your chosen lender or financing company has the option of applying for invoice financing online, the process will be even faster. 

The financing firm, like small business loans lenders, will have many requirements, but outstanding debts will be the most crucial component.

Others may look into your personal and/or business credit, as well as your company’s financial statements.

It’s essential to inquire before you start the procedure so you know where you have the best chance of getting approved.

There may be some lenders that are willing to loan to small businesses that don’t have a healthy credit score, and others that focus specifically on younger startups, so it’s worthwhile to look into it.

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    Lorien is the Country Manager for Financer US and has a strong background in finance and digital marketing. She is a fintech enthusiast and a lover of all things digital.

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    Last Updated: June 3, 2022

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