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What is Invoice Financing?

Invoice Financing: What Exactly Is It?

Invoice financing is a basic, straightforward funding option that many businesses use to solve cash flow problems. Some of the cash flow problems that are solved with invoice financing are slow paying customers or long payment terms, taking on a large order or client, and typical business growth that happens when new businesses are developing and maturing. Invoice financing involves three main parties:

  1. Your company
  2. A factoring company
  3. Your customer’s invoices

Invoice Financing: Fees and Cost

Invoice financing fees can vary depending on various factors. However, generally, invoice financing is considered one of the more cost-effective options for small business financing. This is because it allows you to borrow against the amount you are already owed by your clients.

Before finalizing your decision on whether to opt for invoice factoring or invoice financing, it is advisable to explore other alternatives as well. For instance, you can consider adjusting your invoicing practices to overcome cash flow gaps. If you typically invoice your clients at the end of the month, you may want to test whether it makes more financial sense to invoice them immediately upon completing the work. Such a change in your invoicing strategy has the potential to significantly accelerate payment timelines, which can help alleviate financial burdens.

Ultimately, reviewing your options and carefully evaluating the costs associated with invoice financing will allow you to make an informed decision that best suits your business needs.

Is Invoice Financing Right for Your Business?

When considering whether invoice financing is a viable option for your business, it is essential to acknowledge that the suitability of this financing method depends on your company’s unique financial circumstances. Different financing options will vary in their effectiveness based on specific situations. That being said, there are several advantages to utilizing invoice financing.

Firstly, invoice financing tends to be a more cost-effective choice compared to invoice factoring. It offers you greater control over your company’s image by allowing you to extend payment deadlines to your customers, rather than demanding immediate payment. Furthermore, with invoice financing, you will directly collect funds from your customers once they settle their accounts, eliminating the need for a third party to manage the payment process on your behalf.

In terms of speed, invoice financing has a distinct advantage. Depending on the chosen invoice financing solution, you can expect to receive payment in a significantly shorter time frame compared to using a factoring service. Factoring involves a lengthier application process and extensive due diligence, often resulting in a wait of a week or more before funds are received. Conversely, with invoice financing, it is possible to receive payment within two or three days.

Ultimately, the decision of whether invoice financing is the right choice for your business depends on careful consideration of your individual circumstances. It is advisable to assess factors such as cost-effectiveness, control over payment collection, and speed of fund disbursement when making this determination.

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How does Invoice Financing Work?

The process is simple; it follows these basic steps:

Step 1. Find the best factoring company for your business needs. This is one of the most difficult steps, but don’t worry, we take care of this. Get started by telling us a little bit about your business, such as your industry and location.

Step 2. Fill out the application for the factoring company. Don’t worry, it’s easy and quick. Approval is based on the creditworthiness of your customers, not your own credit.

Step 3. Once you’re set up and approved with a factoring company, you will complete the services you usually provide to your customers as usual.

Step 4. After the work is done, submit that invoice to the factoring company. They will quickly verify that the work has been done with your customer.

Step 5. The factoring company will advance you a percentage of that invoice, typically between 80 to 97 percent. This percentage is dependent on a handful of components, such as your industry.

Step 6. Your customer will pay the invoice amount to the factoring company on their normal payment terms. After they pay, the factor will release the remaining percentage of the invoice to you, minus a small portion that is a basic factoring fee.

Learn more about the process here.

What are the benefits to invoice financing?

Many businesses decide to use invoice financing as a funding source because it’s easy and fast. However, there are many additional advantages to using invoice financing, such as:

  • Fast, really means fast. You can have access to almost all of your invoice amount within 24 hours once you’re set up. We understand that bills have due dates and employees need to be paid on time, and managing your business’ finances can be a challenge. Actively finding the best factoring company for your business will put you in a position to receive money as soon as you need it.
  • Since your customers will be paying the factor, you won’t have to take the time out of your day to hunt down customers and collect payments. You can focus on managing and operating your business to be the best that it can be.
  • It’s much easier to qualify for invoice financing than traditional funding options, such as a bank loan. Approval is based on your customer’s credit and business strength, not your own.
  • There is no negative added to your bottom line when you use invoice financing to fund your business. Loans create debt that needs to be paid back, but this is simply an advance on money that is already yours.

Learn more about invoice financing for your industry.

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