Get Familiar with Invoice Financing
Invoice financing is a type of financing that allows businesses to quickly obtain funding for outstanding B2B invoices. In return, the business pays the finance company a fee- usually, a percentage of the amount borrowed.
Types of Invoice Financing
There are three types of invoice financing:
- Invoice factoring: a finance company purchases outstanding invoices and will collect the payments on those invoices. You will receive an advance of 50% to 80%, depending on the risk profile of the client that owes you the invoice. Once the client pays, you will be paid the remaining amount minus the factoring fee, which is typically 3% to 5% of the total value.
- Invoice financing: this type of financing allows a business to use its accounts receivable as collateral for a loan. Fees for this type of financing are usually around 2% to 4% per month.
- Receivables-based line of credit: this type of financing is a credit line based on the value of your outstanding receivables, usually 80% to 85%. You will pay a pre-determined interest rate based on the balance. Once the invoice is paid, your balance is reduced. Typically, there is a fee when you draw on the credit line, but this is typically cheaper than either of the above options.
Two Types of Factoring
When you use invoice financing, you are responsible for collecting payments from your clients. When you use invoice factoring, it’s the factoring company that takes on the invoices. If the client doesn’t pay, the financing company assumes the risk. This is why factoring companies charge higher fees.
The Two Types of Factoring Are:
- Recourse factoring means that the business is responsible if the invoice isn’t paid. In other words, the business may have to pay back the money received from the factoring company.
- Non-recourse factoring means that if the client doesn’t pay, the factoring company is out of luck. It will not fall back on the business.
Applying & Qualifying for Invoice Factoring
The application process for this type of financing is a fairly straightforward way to get business for your cash. It goes even quicker if the company has an online application.
Since most of the focus is on the invoices, nearly any B2B business can qualify. The caveat is that the company responsible for the invoice is a good risk. If it makes sense for the factoring company to lend against the invoices, they will likely approve the application.
The amount factored depends on the quality of the invoices and credit history. In some cases, this may refer to the borrower’s credit history or the credit of the company responsible for the invoice.
You may also need to provide an A/R report (accounts receivable aging report) and business bank account statements as well. Some companies are willing to work with businesses with bad credit, while others prefer to work with younger startups with low annual revenue. So, be sure to investigate your options.
Who is the Best Candidate for Invoice Financing?
Invoice financing is best for B2B businesses for goods/services after they have been delivered. The business should have a history of invoicing other creditworthy businesses such as clothing, manufacturing, retail, etc.
Businesses that are rapidly growing can use this type of financing to expand. Businesses with slow-paying clients may also find it helpful. It’s typically not a good option for businesses with only a few invoices or clients who are significantly delinquent. It is not meant to be used for debt collection.
If you have good credit and meet other lending qualifications, you may want to look into other financing options, such as a business line of credit.
Which Industries are Best-Suited for Invoice Financing?
This type of financing is useful in the following industries:
- Construction/Real estate
- Healthcare services/medical suppliers
- Business consulting/legal services
Most businesses that regularly invoice other businesses and need to be paid quickly are a candidate. However, this type of financing is not a good fit for B2C or subscription-based companies.
When Does Invoice Financing Make Sense?
This type of financing makes sense if a business needs funding quickly but doesn’t qualify for traditional financing. It may also be an option for small businesses that don’t qualify due to the industry they’re in, business and personal credit scores, time in business, and other factors.
It’s also helpful for businesses that need funding quickly and can’t wait for weeks/months to be approved for other forms of financing.
If you have a B2B company with reliable but slow-paying clients and are in need of financing, consider invoice financing as an option. Contact Skogen Capital Lending for more information.