One of the most frustrating factors of business ownership is waiting for payment. Many businesses use credit to sell to large customers or clients through invoices, but using invoicing can mean that funds get tied up when you need them most. A delay in payment can mean a delay in funds needed for other things. If you need the money owed to you by your customers, then you can use invoice financing as a way to purchase things in the meantime.
Sometimes called accounts receivable financing, invoice financing allows businesses to borrow money despite the money owed to them by customers. This gives businesses a chance to borrow while not having to wait for customers to pay balances in full. Invoice financing frees up time to increase cash flow and invest in growth that you wouldn’t have if you had to wait for customer payments.
Invoice financing gives you a cash advance and uses your accounts receivable as collateral. Your accounts receivable are the invoices waiting for payment by your customers. With this form of short-term borrowing, you can sell your accounts receivable in order to receive immediate funds that can be used for other expenses. Invoice financing guarantees that you’ll see the money for your unpaid invoices right away. This helps to give a more predictable cash flow to fund your monthly operations. If your business is short on capital, invoice financing can provide a quick way to access cash that you’re waiting for.
At FaaSfunds, we understand this is a common problem for business owners. In order to help businesses with unpaid invoices, we offer invoice financing in our marketplace. By signing up, we’ll analyze your business needs and see if it’s the best option for you.
How Do You Qualify for Invoice Financing?
If you deal with invoicing large amounts of money, your business can qualify for invoice financing. More specifically, if you have a business-to-business model of financing and outstanding receivables. The receivables act as the loan’s collateral, so instead of worrying about your business finances, lenders are more worried about if the invoices make sense for them to finance. Essentially, the lender “buys” your invoices, and then takes the money back as soon as the customer pays it. Lenders are more concerned with the credit of those you’re collecting from then the credit of your business on its own, so the maximum funds you can qualify for depends on how many invoices you have and their credit.
How Do You Apply?
Understandably, your business invoices are the most important part of invoice financing. Many lenders have online applications that allow you to directly connect your business’s accounting program. This makes the process easy to move forward with, without any complicated paperwork. The documents you’ll need are:
- Driver’s license
- Voided business check
- Bank statements
- Credit score
- Outstanding invoices
What Will Invoice Financing Cost You?
Invoice financing can be expensive, but it’s a service fee for having the cash accessible now rather than later. Here’s a breakdown:
- Financers typically advance 85% of the invoice and keep 15% in reserve, subject to fees until the invoice is paid by the customer.
- They’ll also often charge a processing fee on the 15% in reserve, often around 3%.
- Lenders will usually charge a fee for every week your customers don’t pay, often around 1% per week.
- So afterward, when the customer pays, you receive that 15% minus the fees. These fees, essentially, are convenience fees.
Some financiers will give you 100% of your invoices, but you must pay them back over a term – often 12 weeks. This is called invoice factoring. By doing things this way, your business doesn’t wait for the customer to pay their debt, the lender will often collect directly from your customer instead. So, the notable difference is that the financer is purchasing your invoices completely and they collect from your customer directly on your behalf. To help break down the costs, here’s an example:
Let’s say you’re a florist. You have a large order for a wedding, and you invoice your customer $20,000 for all the flowers they order and give them 30 days to pay it. If you wanted to fund that invoice immediately, you’d sell it to an invoice financer. They’d pay you 85% of it, $17,000, and keep the other 15% in reserve. In 30 days, when the customer pays the invoice, they pay the $20,000 to the financer. Then, the financer deducts their fees from the money they kept in reserve – 3% of the initial invoice, or $600 – then forwards you the remaining $2,400. If the customer didn’t pay their invoice within the allotted time, the financer would most likely charge an additional 1% per week, so it’s important you get your customers to pay on time.
This can all sound very overwhelming, but that’s why we’re here. When you sign up with FaasFunds, we analyze your business needs and finances and figure out if invoice financing is the best option for you. We’ll also link you up with a industry expert to help you through tough financial decisions. Navigating the financial world is tough, so make it easier with FaasFunds.