Invoice financing is a relatively new financing option. Advantages and disadvantages of invoice financing For example, if you sell $100,000 worth of invoices at a 4% discount, you’d likely receive $80,000 up front and the remainder, minus the discount, when the invoice is paid to the factoring company. To cover the costs and risks of taking on these debts, the financier or factoring company typically buys the invoices at a discounted rate. But for many businesses, this might not be the most desirable approach - it may seem a bit off-putting or confusing to some customers, and while it takes responsibility for collecting the payments off your plate, it also means you have no control over the interactions between the financier and your customers. That means when it’s time to pay, your clients will be paying the financier, not your business.įor some, that’s not a big deal. The first is that invoice factoring involves selling your invoices to a third-party financier, rather than simply taking out a loan based on the amount. But invoice factoring differs from invoice financing in a significant way. With factoring, a lender gives you the money upfront in one lump sum. Invoice factoring is similar to invoice financing from your business’s perspective - in fact, it’s usually considered a subtype of invoice financing. The big advantage of invoice financing is that it enables your business to retain responsibility for collecting payments - in other words, the customer doesn’t know you’ve taken out the loan, and they still make their payments to you, rather than the lender. These loans tend to be for approximately 80% of the total of the invoices, with some variability based on the specific lender you go with. Invoice financing aims to solve this cashflow problem by making the majority of these funds available immediately through loans. Even if you know your clients well and can narrow down exactly when they’ll pay their invoices, you still have to wait for the funds to become available. In practical terms, that means that you may only have a vague idea of when exactly you can expect that money to hit your accounts. Your business can then make use of that capital without needing to wait for sometimes-lengthy payment terms.įor example, let’s say your business has $80,000 in outstanding invoices, with payment terms ranging from 30 days to 120 days. Invoice financing for small businesses, as mentioned above, is essentially the process of taking out a loan for a percentage of the amount of an outstanding invoice. Invoice financing and invoice factoring are two similar-sounding services with some subtle (but important) differences. Your business will also need to pay service fees and/or interest to the lender, which is how they make their money. The exact terms of the financing agreement vary from lender to lender, but generally, the loan will be for around 80% of the invoice total. This can help smooth out the bumps that can come from having multiple invoices outstanding with different clients that all have different payment terms. You get the money upfront and repay the loan when the invoice is paid by your client. You haven’t received the money yet, so unless you have substantial working capital on hand, you may find it difficult to pay for operating expenses.Īlternatively, you can take out a small loan against the balance of that invoice - that’s invoice financing. That invoice has a 30-day payment term.įor the next 30 days, while you wait for the client to pay the invoice, you’re effectively operating out of pocket. Let’s say you provide your world-class service to a client and then send them an invoice for payment. Invoice financing is a fairly simple process. It’s similar to, but not quite the same as, invoice factoring (another form of invoice funding, but we’ll have more on that later). Invoice financing is sometimes called invoice discounting, accounts receivable financing or receivables financing. Instead of waiting for the customer to pay, the business borrows the invoice amount from a lender and repays it when the invoice is paid, usually along with some interest. It’s a way for businesses to enable more consistent cashflow when customers have different payment terms or are late to pay. Invoice financing means borrowing money against the outstanding balance on an invoice as owed by your customers. That makes it a convenient option for many but will it work for you? Read on to find out if business invoice financing is right for your small business. This form of finance essentially provides an advance on outstanding invoices, which you can repay when the invoice is paid by your customer. But even if your sales are excellent, cashflow might be anything but steady.ĭifferences in contracts and payment terms can mean invoices are paid at odd intervals that leave gaps in your revenue. Steady, stable cashflow is vital for small business success.
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