Learn about Invoice Financing, how it works, and how it can help your small business access cash now.
As a small business owner looking to increase your cash flow, we’re sure you’ve heard of the term “invoice financing”. This particular funding solution also goes by the names “accounts receivable financing”, “receivable financing”, or “invoice trading”, but all mean the same alternative solution to helping your business get access to the cash you need right now.
Invoice financing has proven to be a viable alternative funding route, particularly for those who are having a hard time getting financing through more traditional channels.
Invoice financing can be simply defined as borrowing money against outstanding invoices from customers. This financing option is considered an asset-based loan that allows a company quick access to funding to improve cash flow, pay suppliers and staff, and further invest in their business.
What’s an asset-based loan?
An “asset-based loan” involves financing your company’s assets by using them as collateral against the loan. These assets are usually equipment, real estate, or inventory but can also include outstanding invoices your business has. Because your business would be using collateral, it is easier to secure funding from alternative funders when traditional banks won’t lend.
Read more about “Asset-based lending” on Investopedia.com here.
How does Invoice Financing work?
Invoice financing allows businesses to borrow money against what is due from their customers through a third-party lender. The lender will usually charge a fee or take a percentage of the amount borrowed. Invoice Financing is a short-term funding option that allows a company to add to its working capital to facilitate covering business expenses when needed.
For small, start-up businesses, waiting for customers to settle their invoices can keep your much need cash flow too low. Invoice financing is their best option when a business needs money now and can’t wait for its customers to pay.
For example, if you’ve closed a large deal with a client and have a chunk of money credited to you by the client, you can leverage the money they owe you to receive cash to improve your current cash flow. Invoice Financing offers you short-term liquidity and is especially helpful when your business has slow-paying accounts.
The different types of Invoice Financing
There are three main types of invoice financing:
- Invoice factoring
- Invoice financing services
- Receivable-based lines of credit
Invoice factoring: Invoice factoring is the simplest type of financing in this category. The business sells its outstanding invoices to a lender, who then pays a portion of the balances upfront (usually between 70% and 85%). The lender essentially purchases the invoice at a discount but is also responsible for collecting the payment from the business’s customers. Because the lender takes on the risk of no repayment from your customers, this type of lending has higher fees. This method of invoice financing is common for small businesses in the manufacturing, where large inventories and long accounts receivable cycles are commonplace.
Invoice discounting: Invoice discounting, also called invoice financing services, is similar to invoice factoring, except instead of the lender collecting payments from customers, your business does. This way, you can borrow the money without your customers knowing the arrangement. The lender advances the invoice amount to you (up to 95% of the total) and once the customers settle up, you repay the lender – minus an agreed-upon fee or interest rate. The risk to your business is that if your customers default on their payments, you are still responsible for the amount loaned.
Receivable-based lines of credit: This kind of invoice financing is very similar to a conventional line of credit. With this rolling “line of credit”, you can draw funds as you invoice your customers and pay it down later as they pay their invoices. Traditionally, this option allows you to borrow up to 85% of the value of your invoices, and you’ll be charged either a fee, interest, or both.
Is Invoice Financing right for your business?
A comparison table showing the pros and cons of invoice financing.
| Advantages | Disadvantages |
| – Quick approval times Minimal paperwork needed – Help improve cash flow – Easier funding solution than most others | – High-interest rates or fees (or both) – Invoices become collateral – Usually doesn’t work for B2C businesses using POS machines |
| Best for: | Not great for: |
– B2B Businesses – Businesses with long invoice payment cycles or large sum invoices | – B2C Businesses – Subscription-base business models |
Invoice financing can offer companies offer to capital needed for business expenses and growth. Whether you need funds for increasing your staff, investing in new opportunities, or marketing, having the cash flow to be able to spend it when needed is vital to your business growth.
Most B2B businesses qualify for invoice financing as long as the company is in good financial standing and has a history of repaying their debts.
At Capital Quickly, we work diligently to offer a quick and easy approval and funding process so you can access funds quickly. Our Invoice Financing solutions can help your business grow, and we are honored to be a part in it. Check out our Invoice Financing program here. To find the most suitable funding for your business, call 1-888-709-7446 or email us.