Invoice Financing
Invoice financing provides businesses with working capital to improve cash flow, pay employees and suppliers, and reinvest in operations and growth by providing short-term financing secured by outstanding invoices.
Get to Know Invoice Financing
Gerri Detweiler • May 11, 2022
Invoice Financing Pros and Cons
Invoice financing (or accounts receivable financing) has a lot going for it in the right situation, but there are also drawbacks you should consider.
Pros of Invoice Financing for Small Businesses
Pros
- Fast approval, minimal paperwork
- Can improve cash flow
- Often credit flexible
If you’re looking for a fast way to get a short-term type of financing, invoice finance can be a solid option. The application and approval process is much faster than with traditional loans, and funds may be deposited in your account in as little as one business day.
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Get MatchedCons of Invoice Financing for Small Businesses
Cons
- Can be expensive
- Can be difficult to compare cost
- Generally not available for businesses with consumer customers (B2C)
The biggest drawback to invoice finance solutions is the cost. While quick approvals can help you solve cash flow issues almost immediately, you will pay for that convenience.
The fact that your collateral is your invoice may mean some types of businesses immediately won’t qualify. B2C (business to consumer) companies looking for financial help may be out of luck, especially if their cash flow originates at a point-of-sale machine rather than long-term invoices.
In addition, the cost means you’re essentially missing out on the full revenues of customer invoices, impacting profit margins.
What is Invoice Financing?
Invoice financing, also called receivables financing, allows small businesses to get funding quickly for outstanding business-to-business invoices. In return for fast access to cash, a business pays the invoice finance company a fee, often a percentage of the amount borrowed.
Types of Invoice Financing
- Invoice Financing
One type of invoice financing allows the business to use accounts receivables as collateral for a short-term loan. The business will be responsible for paying back the loan, regardless of how quickly (or slowly) the customer pays. Fees are usually 2-4% month. - Receivable-Based Line of Credit
A credit line based on a percentage (usually of 80-85%) of value of your outstanding receivables. The value is calculated based on the aging of the invoices. You will pay a pre-negotiated interest rate based on your balance. When an invoice gets paid, your balance will be reduced. There’s usually a fee when you draw the credit line, but this is usually a cheaper option than invoice factoring or invoice financing with effective APRs that are often less than 20%. - Invoice Factoring
An invoice factoring company purchases outstanding invoices at a discount and will be responsible for collecting payment on the invoices. You typically receive 50-85% of the invoice value up front (also known as invoice discounting) based on the risk profile of the client that owes the invoice. The invoice factoring fee can be structured in any number of ways, but it generally nets out to be about 3-5% of the invoice value.