What is invoice financing?
- 1 What is invoice financing?
- 1.1 What is the difference between invoice financing and invoice factoring?
- 1.2 Overview of invoice factoring and invoice financing
- 1.3 Is invoice financing a good idea?
- 1.4 What is the cost of invoice financing?
- 1.5 How to start invoice financing?
What is invoice financing?
In the life of every small business, there will be a period of time when cash becomes a little tight, and decision makers will look for external sources of funding.
Under these circumstances, many small business owners will seize the opportunity to obtain loans. But not everyone expects the process and time required to obtain a traditional commercial loan approval—provided that you can get the approval first.
For small business owners seeking timely financing to invest in their business and pay operating expenses, invoice financing may be a more sensible financing option.
What is the difference between invoice financing and invoice factoring?
The terms “invoice financing” and “invoice factoring” are often used as synonyms, although they are not the same thing.
Read on to understand the difference between invoice factoring and invoice financing, and see which one makes the most sense for your business.
What is invoice factoring?
Invoice factoring usually requires small businesses to sell their unpaid invoices to a third party at a substantial discount. Believe it or not, as we all know, factoring companies charge 40% of the invoice value as a fee. However, it is more common that factors charge a fee of 10% to 15% per invoice.
Generally speaking, the factoring company will give you a portion of the unpaid invoices in advance. Then, when they receive payment from your customer, they will repay the remainder of the invoice, minus their fees.
This is a key consideration here. When you decide to advance invoice factoring, your customers will ultimately pay the factoring company, not your business. It’s a bit awkward to say the least. To make matters worse, this also opens the door to the possibility of your customers having a negative experience when dealing with the factors you decide to associate, which may harm your chances of doing business with customers again in the future.
More importantly, some factoring companies may decide no If your customer has a poor reputation or poor credit score, buy your unpaid invoice. In order to promote invoice factoring, you need to be able to prove that your customers are value for money and generate stable income on a regular basis.
It is also worth pointing out that, as we all know, invoice factoring companies charge any amount of additional fees-including initiation and account setup fees, lockbox or service fees, incremental fees, unused line fees, and monthly minimum transaction volume fees. , Renewal fees, overdue or collection fees, credit check fees, non-recourse factoring fees, ACH transaction fees and wire transfer fees, and countless other fees. These fees may not be clearly disclosed in advance and may require some digging to understand.
Together, it is safe to say that you need to research your options and read the fine print before proceeding with invoice factoring.
How does invoice financing work for the company?
Often mistaken for Invoice factoring, Invoice financing allows you to borrow outstanding accounts receivable. You can use invoice financing services to prepay unpaid invoices instead of letting unpaid invoices accumulate dust and hinder your business.
In a way, it operates like an on-demand business cash advance for unpaid invoices. When you prepay cash for unpaid invoices, you usually repay the prepayment and a small fee within a certain period of time.
Through invoice financing, small businesses can get Revolving credit line Oppose unpaid invoices without affecting their relationship with customers. In contrast to selling unpaid invoices to a factoring company and generating relevant discounts and dealing with all potential related issues, invoice financing allows you to retain control of all invoices and only borrow from the invoices you choose.
In this case, invoice financing allows small business owners to regain control of their cash flow. Rather than scrambling to accumulate money to pay their monthly bills, they can feel at ease because they know that they can get funds with just one click or the tap of a finger.
In addition to helping small business owners pay for daily operating expenses, invoice financing services can also provide enterprises with enough filling to develop new products; launch new marketing plans; purchase new equipment and technologies; open other locations; and renovate their stores and restaurants And office etc.
Overview of invoice factoring and invoice financing
|Invoice financing||Invoice factoring|
|Use unpaid invoices as your credit limit||Yes||No|
|Prepay up to 100% of unpaid invoice value||Yes||No|
|Use it as needed||Yes||No|
|Sell your invoice to a third party||No||Yes|
|The lender may contact your customer directly to collect unpaid invoices||No||Yes|
Is invoice financing a good idea?
When it really boils down to it, it is impossible to say whether invoice financing is a good idea for your business.
The financial situation of each company is unique, and different financing options are more meaningful than other financing options according to specific circumstances.
In other words, invoice financing is often a more affordable option than invoice factoring. It also allows you to better control the company’s image, because you can give customers more time to pay without having to demand payment immediately. And you will eventually collect money directly from them when they settle the account, instead of letting a third party ask for money on your behalf.
Depending on the invoice financing solution you choose, you should also be able to get paid faster than using factoring services. Due to the long application process and the due diligence of the factoring company, it often takes a week or more to receive funds through factoring. On the other hand, you should be able to receive payment within two or three days using invoice financing.
What is the cost of invoice financing?
As with any other financial instrument, invoice financing costs vary by lender. However, in general, this is a more affordable form of small business financing because you are borrowing.
Before you solve invoice factoring or invoice financing, it is worth exploring your other options.
For example, you can overcome the cash gap by changing your approach Invoice your customers. If you have to wait until the end of the month to send a bill to your customers, consider testing whether you can invoice them after the work is complete. This may greatly speed up the payment schedule.
If you are interested in obtaining fast and flexible financing quickly, you may also need to consider applying Commercial Credit LineIf approved, you can use your line of credit to borrow money and only pay interest on the money you withdraw.
How to start invoice financing?
Fundbox makes invoice financing easier than ever. Creating an account is quick and easy. There is no lengthy approval process or a lot of paperwork to fill out; you only need to enter some basic business details. Next, click to connect your accounting platform (such as QB Online or FreshBooks) to your Fundbox account and provide your business bank account details. If approved, you will see available invoices in the Fundbox dashboard. Select the invoice to be prepaid and voila, the funds will be deposited into your bank account on the next business day.
You can learn all about Fundbox short-term financing interest rate Here, you have 12 or 24 weeks-your choice-to repay the advance payment, plus a small fee. Repayment early, the remaining fees are waived.
Need to raise funds for your small business and pile up a bunch of unpaid invoices? Try Fundbox. Register here.