Invoice financing is a type of working capital loan for small businesses that invoice customers. By using invoice financing, business owners can borrow against the value of money they’re owed by customers. Invoice financing allows businesses to borrow 85% to 100% of invoice values at a starting rate of 0.25% per week.
What Is Invoice Financing?
Invoice financing is a common term for asset-based lending, but can also refer to a broader set of financing solutions that includes invoice factoring. While there are some differences between these options, they are the types of business loans that offer small business owners to borrow against the value of invoices owed by customers and clients.
Invoice Financing vs Invoice Factoring
Invoice financing and invoice factoring are two types of invoice financing that offer small business owners to borrow against the value of customer invoices, also known as the borrowing base. Invoice financing leaves the business to collect the invoices and pay down the advance, while invoice factoring works differently, requiring business owners to assign the invoices and the lender collects the invoice to repay the draw.
The best invoice factoring providers set this advance at 75% to 95% of the invoice value and require the business to assign the invoices. With factoring, the lender collects the invoices from customers and the business isn’t responsible for any payments. On the other hand, invoice financing acts like revolving credit that business owners must make payments on.
Invoice factoring and invoice financing companies specialize, which gives business owners fewer choices for borrowing against invoices. However, FundThrough is one provider that offers both invoice financing up to $50,000 and invoice factoring for any amount over $50,000. This gives businesses an opportunity to start with financing and transfer to factoring as their business grows.
Who Invoice Financing Is Right For
Invoice financing is only an option for business owners who invoice their customers. Businesses that struggle to collect payments from customers can use invoice factoring to act as collections and it’s a good option for business owners struggling to qualify for short-term funding.
Businesses that can benefit from invoice financing include:
- Businesses that invoice customers: In order to use invoice financing, a business must have customer invoices that meet a lender’s requirements. Some lenders only allow business and government invoices, while others accept consumer invoices as well.
- Business owners expanding operations: When companies scale, they often incur expenses before they generate or collect revenue from invoices. This can make it difficult to grow without financing and in this case, both factoring and financing can be a great solution.
- Companies struggling to collect payments: Invoice factoring companies collect invoices on behalf of the business. While this isn’t the same as a collections company, it may be another option for small business owners who want access to troublesome receivables.
There are many other reasons to use an invoice factoring company, including short-term capital needs and managing the invoicing process. Invoice financing is much more common in certain industries like staffing and logistics. However, every business that invoices customers can potentially access invoice financing.
Invoice Financing Costs
Invoice financing is more expensive than most long-term financing options from banks, but it’s comparable to most short-term business loans. While the weekly fee can be high in some cases, business owners are borrowing money against an asset, the invoice, so the overall risk of the loan and its cost is lower. Most lenders also offer a prepayment discount and don’t charge interest after a business owner repays the loan, reducing the cost even further.
Invoice financing costs include:
- Weekly fee: 0.25% to 1.5% per week
- Estimated APR: 10% to 78%
- Additional fees: None
Invoice financing providers charge a weekly fee while financing is outstanding. In most cases, business owners must make weekly payments, but with invoice factoring, business owners don’t need to make payments. Most invoice financing providers offer small business owners funding without additional fees and provide discounts for early repayment.
Invoice Financing Terms
Invoice financing terms include:
- Loan amount: Up to $100,000
- Repayment term: Up to 24 weeks
- Repayment schedule: Weekly
- Personal guarantee: Required
- Collateral: Blanket UCC filing
- Funding speed: As soon as the same day
The loan amounts are small with invoice financing because they are unsecured business loans and lenders prefer not to risk too much capital. The repayment terms are also short, which lenders attempt to match with invoice collection periods. It’s also one of the fastest forms of funding, with some providers offering to deposit funds the same day they approve an application.
Invoice Financing Qualifications
Invoice financing qualifications include:
- Credit score: At least 500
- Time in business: At least six months
- Annual revenue: At least $50,000
In addition to quick funding speeds, business owners also select invoice financing for its low minimum qualifications. Some providers require a business credit score of 500 or higher and minimal time in business. This allows small business owners to access credit even if they don’t generate large amounts of revenue, have poor credit, or only recently started the business.
Invoice Financing Example
After landing a large contract from a repeat customer, a local accounting firm needs to hire new staff to complete work for the client. Although it submits an invoice, the terms of the invoice require the customer to make a payment in 90 days. In the meantime, the accounting firm needs additional resources to hire, onboard, and maintain staff.
The partners of the accounting firm apply for funding from an invoice financing company, showing previous successful collection of invoices and the credibility of the customer. The invoice financing company offers it a $90,000 line of credit based on the value of the outstanding invoice, which is $100,000. The rate is payable weekly and the accounting firm takes the offer.
The accounting firm can use this invoice financing facility to grow its staff and complete the project, with the entire process taking only 60 days. The customer is happy with the work and pays the invoice in full. The accounting firm uses the proceeds from the invoice to settle its financing facility, saves money on interest, and can now access funding for future expansions with customers.
Invoice Financing Providers
Business owners have a variety of online and traditional invoice financing and invoice factoring options to choose from. Selecting the right option depends on the minimum qualification requirements for borrowers and individual invoices, the amount of funding that it requires, and the total cost of the financing available.
Invoice Financing Providers
Easy qualifications for revolving invoice financing up to $100,000
Scaling businesses needing both invoice financing and factoring from one provider
Factoring without invoice assignment up to $5 million and other working capital options
Invoice financing providers include:
Fundbox offers invoice financing up to $100,000 and does not require an assignment of invoices. Its financing facility is revolving like a business line of credit, and business owners can repay a draw in either 12 or 24 weeks. Starting rates are low and business owners can apply online and receive an approval decision within 15 minutes.
FundThrough is an option for growing businesses that need invoice financing today, but expect to outgrow invoice financing and want a lender that will let them switch to factoring. FundThrough offers invoice financing under $50,000 and invoice factoring for higher amounts. The online application process is quick and business owners can receive funding the same day.
BlueVine offers the fastest invoice factoring solution that doesn’t require the assignment of invoices. Within minutes of applying, business owners can receive up to $5 million in funding based on the invoices they have outstanding to business and government customers. In addition, BlueVine is a good long-term financing partner because it also offers business lines of credit and short-term loans.
How to Apply for Invoice Financing
The application process of invoice financing is straightforward. Business owners must provide some personal and business details, like annual revenue, time in business, and identifying information about the business and its owners. Then they can either connect the lender to their accounting or invoicing software to verify receivables. Sometimes, business owners can provide bank statements or a link to their business bank account for verification.
Once a business owner applies for invoice financing, the lender then checks for the value of outstanding invoices, any trends in invoice payments, and the general credibility of the customers that the small business invoices. This process takes anywhere from three minutes for invoice financing and up to two weeks for invoice factoring. Business owners receive an offer for funding and once they accept the offer, the lender will transfer funding to their business bank account.
With invoice financing, the funds require regular weekly payments with a small fee, similar to a business line of credit. Once the business owner repays the amount, the line replenishes, and the business can borrow from it again. However, with invoice factoring, the business owner assigns the invoice and when the factoring company collects the payment, it automatically reduces the outstanding debt.
Pros & Cons of Invoice Financing
Invoice financing can be a quick way to access funding with a low minimum requirement for small business owners. Although it offers a prepayment benefit, which means repaying the financing early reduces the interest cost, it can be an expensive financing option and only offers short repayment terms and small loan amounts. This means it’s a good option for quick short-term funding but limited for larger projects.
Pros of Invoice Financing
Pros of invoice financing include:
- Quick funding: Receiving funding the same business day has become more common, but invoice financing led the way. Lenders use advancements in technology to analyze invoicing and accounting records and can determine approval in as quickly as three minutes.
- Low minimum requirement: Business owners with low personal credit rely on invoice financing because lenders also consider the credit of the customer who owes the invoice. This differs from a short-term loan or business line of credit, which small business owners must repay directly.
- Common prepayment benefit: Invoices have variable repayment terms and each customer repays invoices at a different time. This encourages invoice financing providers to offer a prepayment discount so business owners can repay their advance as soon as they receive payments from their customers.
Cons of Invoice Financing
Cons of invoice financing include:
- High overall costs: While it’s inexpensive to use invoice financing for a few weeks, financing invoices outstanding for the next 90 days can be costly. Business owners needing quick funding with longer repayment terms should consider a fast business loan instead of invoice financing.
- Small loan amounts: While invoice factoring can offer multiple millions in funding, invoice financing is restricted to $100,000. Small business owners needing more funding should consider factoring instead or a business line of credit, which can offer them more financing over multiple draws.
Invoice Financing Frequently Asked Questions (FAQs)
Is invoice financing a loan?
Invoice financing is a loan that, in most cases, more closely resembles a business line of credit. Business owners receive a revolving invoice financing facility that they can draw against when they need capital. Once they make a draw, they must make weekly payments until they repay the entire draw.
What is invoice discounting?
Invoice discounting is another way that business owners refer to invoice financing. Invoice discounting refers to the discount that businesses have to take for the financing, which is another way that lenders frame the fee that they charge. Business owners receive the invoice payment minus a small discount for the financing.
What is import invoice financing?
Financing invoices requires some lenders to specialize in an industry to leverage the insight that specialization gives them. Import invoice financing is for businesses that import goods from overseas and invoice their customers. This financing has more regulations and exposure to currencies, so fewer firms offer it.
Invoice financing is one of the many options that business owners have to access capital. Lenders rely on the value of outstanding invoices and offer business owners access to a revolving credit facility based on that value. It’s a great financing solution for business owners needing funding with low minimum requirements and short repayment terms to keep costs low.
FundThrough offers small business owners both invoice financing and invoice factoring. Its invoice financing facility is best for small business owners who need to borrow up to $50,000. For larger and growing businesses, its invoice factoring facility is available for an unlimited amount of capital. Both have an online application and only two to three days to fund.