What Is Invoice Financing And Is It Right For Your Business?

Invoice financing is a loan product that enables a company to borrow against its outstanding invoices. It is usually used by companies for working capital, but it can also be used for business growth and expansion. 



Invoice financing for small businesses is a legitimate financial tool and is routinely used by small businesses across the country. If you’re considering invoice financing, here’s everything you need to know.





What Is Invoice Financing?



Invoice financing is when a company uses its unpaid invoices as collateral to secure a loan. Lenders typically require some sort of company asset to act as collateral. With invoice financing, unpaid invoices are the asset. Compared to other small business loans, the application process is generally much faster, as is the time to receive funds. 



One thing businesses should keep in mind about invoice financing is that the full invoice amount is not given. While it depends on the lender, companies are typically only able to borrow up to 80% of their accounts receivables. 







Invoice Financing Requirements



The application process focuses more on the creditworthiness of your customers rather than yourself. You’ll also need to submit bank statements and financial documents in order to apply.








How Invoice Financing Works



Here’s what to expect with invoice financing. Once approved, you’ll receive a cash advance based on a percentage of the outstanding invoice (usually around 80%). You can use those funds for whatever operating expenses you need, such as payroll or inventory. When your customer pays the outstanding invoice, you pay the lender back along with the agreed-upon fee.








Costs Associated With Invoice Financing



You do have to pay the invoice financing company for getting the advance. Instead of a factoring fee (as you’d pay with invoice factoring), you’ll pay an ongoing percentage of the invoice amount until your customer pays.



For instance, your financing terms might have you pay 3% of the outstanding invoice every month. On a $10,000 invoice, that would be $300 per month. These costs can quickly add up if your customer is extremely late in paying.








Invoice Financing Pros And Cons



Companies in need of working capital—or who need help financing a purchase order—may find their borrowing needs met with invoice financing. However, there are other loan products on the market that may be a better fit. When choosing an invoice financing lender, make sure to compare its rates and fees with its competitors to ensure you get the best one. 



Pros of Invoice Financing Cons of Invoice Financing Credit score frequently does not matter. It’s available only to B2B or B2G businesses. Payment for unpaid invoices is received faster. Financing amount is limited to your outstanding invoices. Application process is easier.










FAQs







What Is Invoice Financing Used for?





Invoice financing can be used to cover any of a company’s working capital needs. Companies that utilize invoice financing typically use it for things like:




Inventory



Payroll



Utilities



Distribution costs



Rent




Businesses typically use invoice financing to cover their operating expenses (i.e., costs of being in business or expenses that enable a company to generate revenue). However, it’s not uncommon for companies to also use invoice financing to help with growth or expansion.










How Much Can You Borrow With Invoice Financing?





You’re only able to borrow against your company’s accounts receivables. While the amount that can be borrowed depends on the lender, most companies are only willing to lend up to 80% of the invoice amount. 



Lenders typically charge between 1% and 5% of the invoice amount each month. This means the total amount you’ll pay depends on the loan amount and the time it takes your customer to pay.










Who Owns The Invoice With Invoice Financing?





With invoice financing, your company is still in charge of collecting payment from your customers. In most situations, the lender does not contact customers. 










How Are Invoice Financing And Invoice Factoring Different?





With invoice factoring , a third-party company buys an unpaid invoice for an amount less than the invoice total. That company then seeks out the payment from the customer. Once full payment is received, the third-party company pays the original company any remaining amount from the invoice, minus any fees.  



Invoice financing is very similar, only the responsibility for collecting on the invoice stays with the company, rather than moving to the lender.   















Ready to get paid sooner? Apply for accounts receivable financing today with Lendio. 













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Information provided on this blog is for educational purposes only , and is not intended to be business, legal, tax, or accounting advice. The views and opinions expressed in this blog are those of the authors and do not necessarily reflect the official policy or position of Lendio. While Lendio strivers to keep its content up to-date, it is only accurate as of the date posted. Offers or trends may expire, or may no longer be relevant.
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