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Invoice financing is a type of business loan with reduced risk, as it's secured by outstanding invoices. Unlike other types of business lending, there are no interest payments or asset requirements, and finance is limited to the size of the invoices.
If you're tired of waiting weeks or even months for invoices to be cashed and need a more consistent source of working capital, invoice financing can help you manage your business cash flow.
Find out how it works and compare invoice financing options below.
Invoice financing is a type of receivables finance and includes invoice factoring and invoice discounting. Invoice discounting is where you select specific invoices to send to the finance company, whereas factoring involves the finance company having your full invoice ledger and collecting all the debts when they're due.
If you choose specific invoices to finance, you will receive a certain percentage of the invoice, usually 80-90%, within 24 hours. The remainder of the invoice will be transferred to you when the customer pays, minus the invoice company's advance fee.
Invoice factoring is usually settled monthly, but there are a number of different types you can consider.
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Invoice factoring companies make their money through a flat service fee expressed as a percentage of the invoice amount being financed. They also charge due diligence fees to cover the costs of setting up your account, along with discount rates, considered as a compliment to their service fee.
To illustrate, examine the following scenario:
Your invoice amount: $50,000 (to be paid by customer after 30 days)
Advance rate: 80%
Rebate: 20%
Service fee: 2.5%
Discount rate: 10%
Due diligence fee: $400
First, your factoring company would advance you $40,000, which is 80% of the $50,000 invoice amount.
The customer would then pay the invoice in full after 30 days, and the factoring company would rebate $8,021.24 to you, which is the remaining $10,000 that wasn't initially advanced (20% x $50,000), minus fees.
The fees are calculated as follows:
The total fee charged would be the sum of these three calculated fees, which is $1,978.76.
Invoice financing suits a range of businesses, including the following:
There are three main types of invoice factoring, so it's important to choose the one that best suits your business:
There are three important differences that separate disclosed and confidential invoice factoring.
As with other types of business lending and credit platforms, there are several factors you should consider and compare in order to select the best invoice financing provider for you. Here are a few things to keep in mind:
In spite of its differences with credit cards, loans and overdrafts, invoice financing is still a form of borrowing and as such it comes with both benefits and drawbacks.
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