The Merchant’s Guide To Invoice Financing

Every business struggles with cash flow, but businesses that process invoices struggle more than most. Companies purchasing goods or services from B2B businesses have special privileges that customers don’t. Namely, customers have to pay upfront to get the goods and services they need, but companies get extra time to pay.

If you’re a business owner who uses invoices, waiting around for your B2B customers to dish out the dough can be a huge drag on your resources. And these days, companies are taking longer than ever to do just that.

Fortunately, somebody solved the invoice problem a long time ago. Invoice financing (also called accounts receivable financing or a/r financing) helps you turn your unpaid invoices into immediate working capital, either by selling your invoices or using them as collateral.

In the past, certain forms of invoice financing, such as invoice factoring, have gotten a bad rap due to shady marketing tactics and restricting contracts. On top of that, invoice financing is a broad and confusing category with many financing options. The rise of online loans and their non-traditional financing options have made understanding what you’re getting yourself into even more difficult.

So let’s make it easier. Here’s everything you need to know before embarking on your quest to use invoice financing for your business.

We Recommend BlueVine For Invoice Financing

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Fast funding for your business.Apply in under 5 minute and applying won't impact your credit score. Get funds in as little as 24 hours. Getting an offer will not impact your credit score. Only in the case of of sole proprietorships and partnerships, a hard credit inquiry will be made after you receive and accept your offer should you choose to do so. Learn more Credit check details (click to expand)

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What Is Invoice Financing?

The idea behind invoice financing is relatively simple. You’ll receive money before your customers pay their outstanding invoices. Instead of getting payments from your customers, you’ll get your money from a lender almost immediately. This way you won’t need to wait around for your customers to pay, potentially allowing you to invest and grow your company faster.

However, invoice financing doesn’t come without a cost; you’ll usually need to pay fees or interest on what you borrow. Obviously, this situation is not ideal. Nobody wants to give up a percentage of their revenue. From a business standpoint, though, immediate access to revenue gives you the ability to put that capital to use paying employees, purchasing new materials, goods, equipment, advertising, or doing whatever you need to grow your business.

Invoice Financing VS Invoice Factoring: What’s The Difference?

When trying to parse invoice financing, you may have come across the term “invoice factoring“. These financial tools offer similar advantages; however, they are separated by a few key differences:

• Invoice factoring is a purchase agreement. You sell your invoices to a company. This company then typically collects your customers’ invoices on your behalf.
• Invoice financing is a loan. You request funds by showing proof of your customers’ invoices. Once you’ve collected your customers’ debts, you’ll pay back your loan.

It’s worth noting that financing usually offers greater flexibility because you can pick and choose which invoices will be financed. With factoring, you often won’t have that option.

Additionally, you may have less privacy when going the factoring route. This is because customers will find out you’re working with a company when they’re contacted for payment. Financing, meanwhile, offers better privacy because your business will be the only one communicating with customers.

How Invoice Financing Works

If you’ve decided on invoice financing, you’ll need to take your invoices to a financing company. After you apply and offer your outstanding invoices for collateral, the company will determine if your business is a worthy applicant for approval.

Assuming you’ve been approved, the lender will allow you to borrow a percentage of your invoices’ value, typically 85% to 95%. The remaining 5% to 15% sits in reserve.

Note that’ll you might need to pay fees along with your loan. You might have to pay processing fees, draw fees, maintenance fees, or bank wire fees.

You’ll then need to pay a weekly percentage based on how long you take to pay. Lenders routinely charge around 1% per week, but actual costs vary wildly.

After you’ve paid off the loan, you’ll receive the reserve back — minus any fees. The difference is basically the cost you paid to access money faster versus just waiting for your customer (or customers) to pay back.

Is Invoice Financing Right For Your Business?

Invoice financing can be handy because it gets money into your hands fast. Of course, like most loan-centered tools, things aren’t all sun and roses. Here’s a look at a few of the major pro and cons to invoice financing:

Pros:

• Low Borrower Requirements: Because your outstanding invoices act as collateral, lenders don’t care as much about other aspects of your business. This means you might still qualify for invoice financing even if your revenue, profitability, or age of business are relatively weak. However, do note that some lenders consider credit reports, so you should still try to maintain a healthy credit profile.
• Flexible: Invoice financing is more flexible than factoring — you’ll be able to pick and choose which invoices get financed. This means you won’t be required to finance certain invoices when you don’t need to.
• Privacy: Because you’re usually on the hook for collecting invoices from customers, the fact that you’re using a third party for financing will be hidden. This is in contrast to factoring, where customers will likely know that a third party is handling your invoices.

Cons:

• Fees: Invoice financing can have higher fees than other forms of financing. Because fees and interest may mean that you will see as little as 85% of your invoices, invoice financing shouldn’t be used without careful consideration of your business finances. If you’re looking into factoring, note that it comes with its own set of costs.
• It Is Still A Loan: As invoice financing is technically a loan, you’ll only want to do it if your business can afford repayments. If your business isn’t profitable — or can’t afford upfront costs — you might want to consider invoice factoring instead.
• You Do The Invoice Collection: Because the act of financing your invoices is technically a loan, you will likely be responsible for collecting debt from your customers. Invoice factoring, on the other hand, puts the collecting aspect in control of a third-party company.

Where To Find Invoice Financers

Thanks to the digital world in which we now live, many awesome lending companies have turned to the online space to market their craft. Online lending has exploded in an array of non-traditional financing methods over the past decade or so. A few of these new companies have taken on the task of updating invoice financing.

Online companies have made the invoice financing process easier in a number of different ways. Their application processes are completely web-based and you are in control over which invoices get financed. Plus, these companies lack extra fees and often don’t require long-term contracts for use of their services.

Aside from those characteristics, financing companies are so diverse that you’ll have to investigate them individually to decide which one best fits your business. Here are Merchant Maverick’s favorite invoice financing picks:

• For small businesses: Fundbox or BlueVine
• For large businesses: P2Binvestor

For those curious about looking into invoice factoring instead, we’ve done a total breakdown on the best factoring companies for small businesses.

Check Out BlueVine For Invoice Financing

Get an offer today

Fast funding for your business.Apply in under 5 minute and applying won't impact your credit score. Get funds in as little as 24 hours. Getting an offer will not impact your credit score. Only in the case of of sole proprietorships and partnerships, a hard credit inquiry will be made after you receive and accept your offer should you choose to do so. Learn more Credit check details (click to expand)

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Final Thoughts

At its core, invoice financing is a simple concept: it’s a way for businesses to smooth out cash flow. The agreement doesn’t have to be complicated. When you’re looking for an invoice financing partner, find one that works on your terms. If you need to keep the arrangement discreet, find a funder willing to honor that. If you only need to redeem an invoice occasionally, find a funder that is more lenient.

If you find that you’re needing to routinely finance invoices to maintain your business’s cash flow, it may be worth checking out our article about key strategies for improving cash flow.

If you don’t like the sound of financing invoices, but still need to smooth out your cash flow, you could consider getting a line of credit.