Invoice Financing. Find The Lowest Rates on Invoice Financing
Accounts receivable financing or invoice financing is a financial product that lets you get paid for any of your outstanding invoices right away in exchange for a fee.
How Does Invoice Financing Work?
Accounts receivables financing or invoice financing companies advance you cash collateralized by your business’s outstanding invoices thus giving you your business a great way to put any needed money into your business fast. Typically with invoice financing, you could get an advance of about 85-90% of the value of your invoices with most of the other 10-15% paid to you at a later date. This is a great product to cover late-paying customers or remedy any cash flow slowdowns.
One of the most frustrating aspects of running a growing business is waiting for your invoices to be paid, especially when you have customers that don’t pay you on time. Any delayed payments can be problematic as it can prevent you from putting that needed capital right back into your business.
With accounts receivable financing or invoice financing, you have the option to get paid for your invoices right away without having to wait sometimes months at a time to get paid.
Typical Scenario of Invoice Factoring at Work
Let’s say you own a local bakery and sell baked goods to a local restaurant chain and bill your customer for $10,000 and send them an invoice.
This particular chain has an agreement to pay off its invoices in 30 or 60 days, but you need the cash by next week so you can pay your employees. You could turn to a traditional bank for a small loan, but it will likely require collateral (a physical asset, such as real estate or equipment, which can be later be repossessed and sold by the lender in the event that you default on your obligations) as well as excellent personal credit. You may qualify but can’t really afford to wait several months for the loan to close, so this is where an invoice factoring company comes in and it agrees to buy your future invoice for $9,700 in cash [$10,000 minus a 3% factoring fee ($300)]. The invoice factoring company advances you 85% (or $8,245) of the invoice within a few days. The factoring company then in turn collects the invoice when it’s due and advances the remaining balance of $1,455 owed to you.
Invoice factoring pros and cons
Fast cash: Invoice factoring can provide immediate working capital to help cover a funding gap caused by slow-paying customers.
Easier approval: Invoice factoring provides financing to companies that might not be able to get capital from other sources, such as traditional banks, because of a lack of collateral for a loan, poor personal credit or a limited operating history. Invoice factoring companies typically only care about the value of the invoices you are looking to factor, as well as the creditworthiness of the customers.
Improved cash flow: You can keep loyal customers on longer payment terms. This feature can improve your cash flow and help you grow your business.
Costly: The service can be quite expensive. You have to watch out for hidden fees, such as application fees, a processing fee for each invoice you finance, credit check fees, or overdue fees if your client is past due on a payment, which can increase the APR (the annual cost of borrowing money with all fees and interest included).
Loss of direct control: Because the invoice factoring company may collect on the invoices directly, you need to make sure it is ethical and fair when dealing with your customer.
Customer’s bad credit could derail financing: The factoring company may need to verify the credit worthiness of your customer. If the customer has a history of late payments, you may not be approved for the financing.
If invoice factoring is not the right option for you or your business, please check out other financing options on our small-business loans page.
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