The Merchant’s Guide To Invoice Financing

If you’re a business owner who uses invoices, waiting for your B2B customers to pay can be a huge drag on your resources.

Fortunately, 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, invoice financing has 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.

We’re here to make it easier. Here’s everything you need to know before using invoice financing for your business.

What Is Invoice Financing?

Invoice financing is simple. Instead of receiving payments from your customers for their outstanding invoices, eligible invoices will be funded by a lender. This means you don’t have to wait for your customers to pay and can receive near-instant funding to improve your business’s cash flow.

As expected, invoice financing doesn’t come without a cost. Invoice financers will require you to pay fees and/or interest on what you borrow. However, these costs could be worth it, as 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

Invoice factoring is a term that is often used interchangeably with invoice financing. While the two share some similarities, there are distinct 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.

Invoice 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.

If invoice factoring sounds better suited for your financial needs, start your search with our picks for best invoice factoring companies.

How Invoice Financing Works

If you opt to use invoice financing to fund your business, you’ll first need to find an invoice financing company. Once you’ve found a reputable financer to work with, here’s what to expect next:

1. Apply For Financing: You’ll fill out an application and offer your outstanding invoices for collateral. The financer will review your application and determine if you qualify.
2. Receive Funding: Once approved, you’ll be given a percentage of the value of your invoices. This percentage is typically 85% to 95%. The remaining funds are held in reserve.
3. Collect Customer Payments: While actual rates and terms vary by lender, you’ll typically be required to pay a percentage of around 1% to 2% each week until your customers pay their invoices.
4. Repay Your Loan: Once invoices are paid, you can repay your loan. You’ll then receive the reserve back — minus any fees charged by the lender.

Note that additional fees may apply based on the policies of your chosen lender. This includes processing fees, draw fees, maintenance fees, or bank wire fees.

Is Invoice Financing Right For Your Business?

While invoice financing is a fast way to get funding, it’s important to weigh out the pros and cons of this type of financing to determine if it’s the right choice for your business.

Where To Find Invoice Financing

Fortunately, it’s fairly easy to find an invoice financer. Online lending has exploded with an array of non-traditional financing methods, and many online lenders now offer invoice financing.

Online lenders have simplified the invoice financing process. Application processes are completely web-based, and you are in control over which invoices get financed. Plus, many lenders don’t charge extra fees and often don’t require long-term contracts to use 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.

The Bottom Line On Invoice Financing

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.

Remember to do your research, compare lenders, and consider other options that may work for your business, such as small business loans and business lines of credit.