What is Invoice Financing or Factoring?
Invoice financing, also called Invoice Factoring or invoice discounting, is a form of accounts receivable financing that allows business owners to get quick cash flow from unpaid invoices. Sometimes, overdue or unpaid invoices take 30, 60, or even 90 days to be paid — which can cost your business necessary resources. Invoice financing gives your company the opportunity to get quick funding back into your operation when you sell your invoices through an invoice factoring company for quick short-term financing. Your accounts receivable act as collateral, which means you can get an advance fast.
Let's take a closer look at invoice financing(invoice factoring). Invoice financing companies offer an alternative route to credit card and credit line debt so your company can succeed through a form of accounts receivable financing. Whether you’re dealing with a bad credit score, a short time in business, or you’re tired of dealing with traditional funding options — invoice financing is a type of financing that offers a cash advance off of invoices (accounts receivables) when you need money now to improve cash flow. A sort of accounts receivable line if you want to think of it that way.
How Can Invoice Financing Help You?
If your company deals with a constant influx of unpaid invoices, you already understand how difficult it can be to live on the edge of whether or not a customer pays. Day-to-day operations rely on these payments, and when invoices begin to pile up, your cash flow situation becomes a gray area. That’s where invoice financing or receivables financing services come into play.
But how does invoice financing work? Through invoice financing (invoice factoring), you’re able to collateralize invoices in exchange for an advance from an invoice factoring company. For roughly 85% to 90% of the invoice value, you’re able to get cash flow fast. What about the remaining 15% to 10%? Well, the invoice factoring company holds this amount in reserve. A portion of it will be returned to you, and the rest is subject to invoice financing costs (Factor Fee) and processing fees. These fees are dependent on how long it takes your client to pay and are calculated based on a weekly schedule.
When it’s all said and done, the factoring fee and processing fee are a “convenience fee.” If you need money fast and have unpaid invoices, invoice financing offers a solution you can fall back on. Invoice factoring companies are essentially purchasing your invoices and returning a portion of the return to you for a small fee. The convenience of invoice financing and invoice factoring or receivables financing for that matter comes down to two main factors.
- You need fast cash to keep your operations running smoothly. Invoice financing offers a way to deal with unpaid invoices by trading a portion of their total for cash on hand now.
- When small businesses have a difficult time obtaining business credit. You’re unable to receive funds from a traditional bank loan or other lenders' business loans due to qualifications. With Invoice financing the company with unpaid invoices is not evaluated as much as the clients they are invoicing.
Why you should consider invoice financing to help your cash flow:
- Financing helps build your business credit
- Quicker than a short-term loan
- Cheaper than traditional loans or lines of credit
- Invoice financing is not a business loan or term loan. No need to borrow money and repay debt
- Enhance your purchasing power
Delayed payments from clients where a customer pays invoices late block up your sales funnel, and increase accounts receivable to uncomfortable levels. We see this issue far too often here at AdvancePoint Capital, which is why we offer some of the best invoice financing services available. As your invoice financing solution,, we can offer a different approach to getting paid for your invoices fast. Skip the wait and give invoice financing or accounts receivable financing a try.
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How Does Invoice Financing Work?
Invoices Are Issued to Clients
The first step in the process is pretty common and simple. An invoice is created for a client based on an order that has been completed, letting the client know how much they owe for the order and when payment is due. The details and terms of the invoice is also called the “net” terms.
Submit Outstanding Invoices to the Factoring Company
The invoice is then sent to the invoice factoring company for review, processing, and approval of invoice discounting based on the terms of the invoice financing agreement. This can be done by an online management portal or through a designated email.
Getting the Advance Payment
Invoice factoring companies will process and verify the sent invoice(s) that are being “sold” to them and will then give you the prepayment, typically worth 85 to 90 percent of the total invoice value, or unpaid invoice, depending on your invoice financing agreement. The advance payment is the immediate money you get as the company owner of the invoice.
Prepayments are made by ACH via direct deposit to the company owner’s bank account. If you need the money sooner than an ACH, you may ask your financing company to send you the payment via wire transfer, which can be sent the same day to the next day.
Collecting the Invoice From the Client
The invoice factoring company is responsible for the collection of the outstanding invoices submitted. Invoices are payable within a certain period of time, and at some point, the client is required to make the payment to the financing company based on the original net terms. When the client has paid in full, the financing company receives the money, and the invoice is settled with the client.
A schedule of accounts and accountability of all invoices being advanced are usually available with an online portal provided to the customer. Sometimes, smaller invoice financing companies may email the “daily schedule of accounts,” which lists the statement(s) that the company owner “sells” them, the amounts, and the due dates of the invoices.
Business Owner Receives the Remaining Funds From the Invoice
When the customer pays the bill in full, the company owner receives the remainder of the invoice proceeds (reserves) from the invoice factoring company minus the factor cost and processing fee(s) established in the contractual agreement.
Invoice Financing Means Instant Cash Flow
If you could trade your unpaid invoices for instant money, would you? Perhaps you’ve hit a rough patch in your company, which happens all the time. Or, maybe you’re running low on finances. Whether it’s getting started on an upcoming project, handling taxes, or making payroll to pay employees — cash on hand is a crucial part of running a company. If you have outstanding invoices, you’re missing out on the monetary assets you need to keep your operations running smoothly. Invoice financing can give you peace of mind.
Financing & Fees of Accounts Receivable Financing
An invoice financing arrangement is a simple method that small business owners like you utilize to tackle bills or immediate costs. There are fewer qualifications required because the risk to the lender is less than alternative loan options. However, there are still fees and restrictions involved with invoice financing services.
This financial solution works through processing and financing fees, which requires a bit of math to understand. Let’s explore an example of how invoice financing works.
Let’s pretend that you have a $10,000 invoice with 30-day terms — how might this scenario turn out
- Accounts receivable finance company gives you a credit line of 90% of that amount, equaling $9,000, while holding the remaining amount, $1,000, in reserve.
- Once the invoice is paid, the customer then pays the invoice finance company a financing fee of 3% ($300).
- The financing fee is applied, which in this scenario is 1% per week — for two weeks.
- After that two weeks are up, the 2% financing fee equals $200.
- The accounts receivable finance company pays the customer back the money that was held in reserve, which is $1,000.
- At the end of the day, you’ve paid $500 of your original $10,000 statement for an immediate, upfront payment of $9,000 from the financing company. This is invoice discounting.
In our example, you can see how this is a sound option for quick, available funds, especially when your company is strapped for resources in the short term. However, if you’re looking ahead to the future and see better finances on the horizon, this is a great way to mitigate immediate financial concerns for your small business.
Is Invoice Financing Worth the Cost?
The answer to this question depends on your company. You may be thinking that the cost associated with invoice financing is not necessary. Well, if you’re in need of a quick cash advance for your enterprise, invoice financing may be the best option.
Say you need money to improve cash flow, make payroll, or complete some much-needed renovations for your small business, then invoice financing may be a sound choice, and the financing cost of invoice financing fees may not look too shabby. Factor costs are typically between 1% and 3% of the statement total, plus any other processing fees. This is all dependent on the company you work with.
Really, it comes down to weighing the pros and cons of invoice financing for your business’s current financial circumstances. If quick money could drastically affect your company in a positive way to improve cash flow, a fast cash alternative from unpaid statements can be a great way to move forward. Not all invoice financing companies are equal. A little research and help from Advancepoint to find the right invoice factoring company can make all the difference in the world. Let Advancepoint provide invoice financing for your business.
Features of Invoice Financing
Accounts receivable financing has a lot of unique benefits and features that small business owners can take advantage of for their company. This financial solution removes the painstaking process of waiting for payments because these outstanding invoices act as collateral for future cash flow. Plus, the funding is based on the credit of the invoiced client, which gives businesses that may be struggling with their own credit history the ability to receive business loans or lines of credit.
The invoice factoring company is tasked with managing collecting payment from the client or customer, which means you don’t have to worry about collecting payment yourself. It’s a simple and flexible option for small business owners looking for an ideal quick-fix funding solution for their businesses.
In as little as one business day, you can have the pre-payment in your bank account and use it for cash flow issues, working capital, renovations, or whatever your company needs.
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What Are the Qualifications of Invoice Financing?
It’s simple to qualify for invoice financing. Any company that has a B2B model with outstanding receivables can qualify for invoice financing. This financing opportunity is far different than the majority of advances and loans because it doesn’t rely on the business owner’s revenue, time in business, profits, or personal credit history. So, it’s perfect for small businesses struggling with bad credit issues or that just started up and don’t necessarily have the years in the industry to receive traditional business loans, lines of credit, or other funding.
Invoice financing companies are not nearly as concerned with traditional qualifications. Instead, they take a deep look at the client you are invoicing because it is the client's credibility they will use to advance cash to your company. If you’re curious about the amount you’re able to qualify for with invoice financing, the advance maximum is based on the invoice financing agreement.
Generally speaking, an invoice financing company will look for an average monthly account receivable ledger of around $50,000 from the company owner to the invoice factor. However, depending on the invoice factoring company, exceptions can be made to account for a wide range of variables.
Invoice Financing companies will take an in-depth look at the credit worthiness of the client that is on the invoice rather than the company owner who is receiving the advance. The invoice financing company is far more concerned with the credit of who is on the bill that they have to collect from because they are the ones making the payment to the invoice financing funder.
What is Required to Apply for Invoice Financing?
Because invoice financing options offer such a unique methodology, they are actually easier to apply and qualify for. Since the collateral is in invoices rather than in assets of the company owner, the person paying back the lender is responsible for creditworthiness and other qualifications. To apply for invoice financing and eventually get approved, you must provide the following:
- One page application
- List of names of businesses and contact info you are invoicing
- Accounts receivable ledger
- Actual invoices and their terms
- Good credit history from the client being invoiced
- Quality A/R and A/P reports
- At least $25,000 in monthly invoice volume
- No credit checks for business owners who is looking for invoice financing required
- A line of credit up to $5 Million
- Invoice Value advanced up to 90%
- Invoices accepted with "net" terms of up 90 days
If you need money fast and don’t want to deal with the complex issues plaguing alternative forms of financing, invoice financing options are a great way to get the money you need for your small business now. Fill out our simple form today.
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Approved for Invoice Financing — What’s Next?
Once you’re approved for invoice financing, you will get a “Letter of Intent” or an “Approval Terms Disclosure.” These documents describe the terms and fees of the financing relationship and are important statements you should know about.
The following items may be covered in the Letter of Intent or Approved Terms Disclosure:
Maximum Advance Amount
Sometimes cash flow can get tight, and a working capital loan is needed to maintain proper levels of money to operate the business and maintain control of cash flow.
A percentage of the maximum advances per month. This is only charged if the monthly minimum fee is greater than the fees actually paid. (This fee is typically 1%.)
This percentage is the approved net collectible value of each amount invoice finance companies elect to purchase. Typical agreements are up to 85% to 90%.
Invoice financing companies may require audits from time to time, in which clients agree to pay finance companies for all reasonable out-of-pocket expenses for performing such an audit.
This details the receivable management services and responsibilities of the invoice financing company. This should include credit management, collections, cash application, and access to real-time online reporting.
Contract (Agreement) Term
Lists the term of the agreement or contract—usually six months to one year.
A service fee may be charged with the face amount of each purchased account for the first 30, 45, or 60 days, and then a different percentage for each set amount of time thereafter. Typical fees range from 1% to 2% within net terms and .5% or more beyond the net terms for a future set amount of time.
Usually, a first priority perfected security interest in clients’ accounts, invoices, chattel paper, contract rights, general intangibles, books, and records, and all proceeds of the foregoing are required.
Due Diligence Fee
This non-refundable documentation and due diligence fee may be charged to a client at the time of acceptance of the proposal or offer. It is not always charged but is usually between $250 and $500.
Any other conditions that might affect the agreement.
The business owner(s) should expect personal guaranty from the principal shareholder(s); Corporate guarantees from any parent entity and all wholly-owned subsidiaries, if applicable. Nonrecourse invoice factoring,
Additional Key Features of Invoice Financing
- Invoice size from $5k to $1 million
- The advance rate is 80%- 90%
- Pricing depends on volume (for example $2 million volume, we can price it at 1.5% for 30 days, 2% for 45 days, and 2.5% for 60 days)
- Pricing is 1% to 3% depending on the risk
- Most of our financing facilities are non-recourse financing
- Recourse is an option for healthier companies (profitable with strong guarantors)
- We can work with IRS tax issues, poor credit, etc.
- Terms can go out 120 days and exceptions to 150 in some cases
Regardless of the invoice amount, you can get the money you need in a pinch for renovations, working capital, and more with AdvancePoint Capital’s invoice factoring. For those that have had difficulties obtaining other types of business loan products, invoice financing could be a perfect option.