Invoice financing allows small business owners to fix cash flow issues by getting advances on unpaid invoices. This type of financing helps businesses improve cash flow, pay employees and hire new ones, and reinvest in operations in growth right away instead of waiting until customers pay their invoices in full.
What is Invoice Financing?
Invoice financing, also known as accounts receivable financing, is a way for small businesses to borrow money against unpaid invoices from customers. It works by using account receivables as collateral to get the advance. You are held responsible for the relationship with the customers and dealing with payments, including late payments.
With invoice financing, you no longer have to wait for funds from your customers that take months to pay their invoices. This is favorable for many small businesses and start-ups because it is less risky than traditional loans. Since you are using the invoices those count as collateral and you are not borrowing money so invoice financing won’t affect your debt ratio.
If your small business is in the following industries, you have a better chance of qualifying for invoice financing.
- Real estate
- Healthcare services
- Legal services
If you have a business-to-consumer company or subscription-based revenue company, it unfortunately won’t be a great fit for you.
Invoice Financing Pros for Small Businesses
- Fast approval and minimal paperwork
- Reduces cash flow emergencies
- Relies on customer creditworthiness
- No waiting for customer payments
- Invoices themselves work as collateral
- Easy process
Invoice financing is appealing to most small businesses due to its many advantages. It is a solid option when looking for short-term borrowing and makes it an easy process for the borrower.
Invoice Financing Cons for Small Businesses
- Fees increase over time (processing and late fees)
- Higher fees than traditional business financing
- You lose control with your customers
- Doesn’t work for business-to-consumer businesses
Although invoice factoring has a fast and easy approval process, the cost of invoice financing is high. The overall cost may cause you to lose some money with the high fees.
How to Apply for Invoice Financing
It is simple and fast to apply for invoice financing and get cash right away for your business. As with any type of loan, there will be various requirements needed for your application, however the unpaid invoices are the most important. Depending on the lender you go to, it is in your best interest to ask what they require to have a better chance of approval. Some might accept a low or poor credit, others may not, so it is worth asking and investigating what are the requirements you need when applying.
4 Loans That Work with Invoice Financing
When looking for financing for your small business, invoice financing alone may not be enough for your needs. One way to get the best financing possible is by combining invoice financing with another type of business loan. Depending on the financial situation and industry of your company, one of the following four loans will work well for you and your business.
- Line of credit – this financing tool works like a credit card, except you have easy access to the cash. You can set a limit and only take the funds you need while paying interest on only what you use. When you combine a line of credit with invoice financing, you will never be short on cash.
- Term loan – term loans are great for business expansions, hiring employees, or real estate. Since it is a long-term financing solution, it works well with invoice financing. Which can be used to keep up with short-term expenses that your business may have.
- Personal loan – when customers don’t pay their invoices on time, a personal loan works well with invoice financing as it can be used for different types of short- and long-term expenses. Invoice financing provides enough cash flow for your business to stay alive even when customers don’t pay on time.
- Equipment financing – when equipment financing and invoice financing are used together, you ensure you have the cash and equipment to expand. This will help your business grow.
When invoice financing is combined with one of the loans mentioned above, you will be able to meet your capital needs and you can then focus solely on the growth of your business.
The Bottom Line
Invoice financing is a great solution for small businesses looking for funds when they have unpaid invoices. It’s important to weigh both pros and cons when taking invoice financing into account. There is also the option of combining invoice financing with a business loan in order to stay cash-flow positive. Whichever option will drive your business forward is the best for you and your business.