Invoice Financing: What It Is and How to Get It
Whether a small business is facing cash flow challenges or a lack of funding opportunities, there are alternatives to traditional financing solutions.
Invoice financing is one such solution.
We explain invoice financing, the pros and cons, and where to secure invoice financing should you need it.
What Is Invoice Financing?
Invoice financing is a method in which businesses leverage their outstanding invoices to secure funding.
Basically, your outstanding invoices act as collateral. You provide your invoice finance lender with copies of your invoices, your chosen invoice financing company provides you with a portion of the total invoice amount, and then you pay back the amount you borrowed plus interest.
You receive the remaining funds once you’ve paid your invoice finance lender, if applicable.
If you have a cash flow issue or you’re finding it difficult to qualify for traditional funding sources like a business line of credit or a term loan, invoice financing offers a viable alternative for B2B businesses who want to access funding before their customers have paid.
But there are a few things you need to know before seeking out these services. This includes the difference between invoice financing and factoring, as well as the pros and cons of the former.
Invoice Financing vs Invoice Factoring
Searching for invoice financing will often lead you to invoice factoring. While the two may seemingly be used interchangeably, they’re two different things. Invoice factoring features a different invoice management style.
Invoice financing helps you tap into funding by sending copies of outstanding invoices to invoice finance lenders. They give you a loan that’s slightly smaller than the total invoice value. Once that invoice is received, you pay the loan amount back plus interest.
Invoice factoring sees you sell your unpaid invoice. You receive slightly less than the total invoice value. But rather than having to collect customer payments as you normally would, the buyer assumes responsibility for collecting the debt.
With invoice factoring, you’re still on the hook for late payments or non-payment. There’s still an interest fee tagged onto the agreement that will reduce your payment for however long the client takes to pay.
There are some companies that may take full responsibility for payment. However, you may have trouble finding those who will take the losses if a customer fails to make their invoice payment.
You’re likely to be responsible for unpaid invoices with the average invoice factoring company.
The only thing that fundamentally changes is how unpaid invoices are managed. This is one potential downside of invoice factoring. Small business owners are naturally worried that invoice factoring companies may ruin customer relationships with how they pursue customer payment.
If you’re concerned that invoice factoring could damage your reputation, use accounts receivable financing rather than invoice factoring. The former helps you stay in control of the process with an invoice financing company.
Take care that you don’t accidentally apply for similar forms of financing, like invoice discounting (cash advance for invoices), as well.
Invoice Financing Pros and Cons
Pro: Easy Access to Cash When You Need It
Invoice financing is often sought out because of its easier qualification requirements. Your unpaid invoices serve as inherent collateral. Invoicing companies will look at your credit history or your time in business. However, these likely won’t be a primary focus.
They’ll be looking at how often and when invoices are paid to ensure they’ll get paid.
This gives you easy access to cash when you need it. If you need to boost your cash flow and tap into quick funding, your invoices can prove useful even before they’ve been paid.
When your credit score is low and your traditional loan options are limited, you can make invoice financing work for you.
Con: High Fees and Late Customer Payments Could Cost You
Invoice financing is quick and accessible. However, it’s not without its downsides.
The interest fees associated with invoice financing can see you losing cash if you have to wait for long periods before your customers pay your invoice. The longer you have to wait, the more you’ll owe the lender.
It’s important to remember this before seeking out invoice financing. While invoice financing can be more accessible and help you fund your business fast, it will come at a cost.
How to Qualify for Invoice Financing
Qualifying for invoice factoring requires you to:
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Procure financial documentation like bank statements, business or personal tax returns, and specific items like an accounts receivable aging report. Traditional invoice financing companies will lay out their requirements on their website.
Invoice Financing Companies
1. BILL
BILL is a popular financial operations platform you may already be aware of. Their platform helps you streamline your accounts payable process, optimize cash flow, and manage spend and expense.
They also offer an EIN-only corporate card worth considering if you’re looking to fund your business.
But one service that may get overlooked is their invoice financing software.
BILL expedites your invoice financing needs, helping you get paid “in as little as five to ten minutes.”
BILL’s invoice financing software boasts:
The most important thing to note is that this is currently only available to a limited number of customers. If you use BILL, you may qualify.
Other qualification requirements include an eligible bank account that supports instant payments, invoices with an invoice value of at least $100, and a limit of up to $100,000 in invoices you’re looking to fund that fit their required timeframe.
2. SLR Business Credit
SLR Business Credit is a business financing company that focuses on funding small businesses through working capital financing, asset-based lending, and invoice-based financing.
SLR Business Credit will offer around 80 to 90% of your total invoice, allowing you to tap into funding when you need it most.
The problem? SLR Business Credit is an invoice finance provider that’s not very transparent about its invoice-based financing. They don’t list terms, eligibility requirements, or other details about this form of financing they offer.
If you’re interested in getting invoice-based financing from them, you’ll have to get in touch with them to speak to an expert.
3. Upwise Capital
Upwise Capital is another solid choice to consider when you want invoice financing.
They give fast advances of an 85% value in invoices, with the opportunity to get the other 15% back later.
With Upwise Capital, you can expect:
Upwise Capital does have some downsides. Notably, interest rates will be anywhere from 8% to 30%, which is quite sizable. They say they don’t care as much about time in business or credit, but they do list average requirements.
These include annual revenue of over $150,000, an average credit score of over 600, and at least one year in business. Keep this in mind before applying for invoice financing with them.
Invoice Financing Alternatives
Invoice financing is but one funding option if you have limited credit and don’t qualify for other forms of business financing.
It’s important to remember that there are alternatives. If invoice financing isn’t the best choice, you might wish to consider other asset-based loans.
Equipment financing, for example, can help you secure funding for essential business expenses. Your equipment serves as collateral, and you can circumvent the strict credit and other eligibility requirements demanded by traditional financial institutions.
Another option is EIN-only business credit cards. EIN-only credit cards allow you to secure business funding without putting your personal credit at risk.
Corporate cards and fleet cards will help you fund your business and build credit. If you want to supplement them, consider startup business loans that use EIN-only or a $50k no doc business loan.
Just take care to remember that these alternatives still come with their own eligibility requirements that you may or may not meet at this point in your small business.
When to Avoid Invoice Financing
Invoice financing is less restrictive and much faster than other forms of financing. You get immediate cash, and you can boost your cash flow in a matter of days rather than having to wait.
But that doesn’t mean it should always be the first financing option you choose.
Avoid invoice financing when you can secure cheaper small business financing in other forms. For example, suppose you can qualify for a business line of credit or a term loan with a bank or another financial institution. In that case, this will be more advantageous for your business.
If your options are limited to invoice financing, it might be your best choice. If you can secure other forms of financing that feature lower interest rates and better payment terms, like a traditional business loan, opt for those instead.
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