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Invoice Financing, Explained

What is it, why it’s essential, and how to harness its superpowers.

Invoice financing keeps the lights on, ensures you stay afloat while competitors flounder, and is often the secret to small business growth. Sounds great. But what exactly does it entail? Here’s a deep dive into the funding strategy—you’re going to want to bookmark this. 

Invoice Financing (The Easy Definition)

Invoice financing unlocks the cash you have tied up in unpaid invoices. And it has multiple monikers: receivables finance, accounts receivables finance, and invoice factoring. The payment is immediate. Your company expenses get covered. Mission accomplished.

How It Works In 5 Steps

Somewhere in an unknown universe is invoice limbo. It’s a place where wilting accounts receivables float around while slow-paying clients do anything but rush to pay. Here’s where the invoice financing process begins. 

Step 1: Apply to a factoring company, get approved, and set up an account (sounds like three steps, but it’s so easy it feels like one).

Step 2: Sell unpaid invoices to factor company.

Step 3: Factor company advances up to 90% of the invoice amount to your bank account.

Step 4: Client pays the factor company when the invoice is due.

Step 5: You receive the remaining amount (minus any factoring fees).

What Makes Factor Companies Swipe Right

Like any good match, there are a few things to consider. The big one? Your customer’s creditworthiness. Which only makes sense since they’re paying the invoice. The average monthly revenue, at least the last three months, will also come into play. FYI, there’s usually a minimum. Lastly, your time in business. This variable can be a big advantage for startups and SMBs that have only been in the game for months. 

10 Best Reasons To Consider Invoice Factoring

  1. Fast cash. How fast? Think the same day or within 24 hours.
  2. You know when you are getting paid. Meaning you can make concrete plans for your business. 
  3. Working capital without debt and stress.
  4. Your staff will have time to do something other than chase down unpaid invoices. Finally.
  5. It’s a smart way to leverage customers with excellent credit since getting approval weighs more heavily on them than you.
  6. The number of invoices you factor is all up to you.
  7. There’s built-in flexibility as factoring arrangements accommodate your company’s needs.
  8. Factoring gives you more control over the flow of your cash…
  9. …and the resources to grow, invest, and grow.
  10. That opportunity you couldn’t fund yesterday? Today it’s a different, better story.

Invoice Financing Myths Debunked

There are a few misconceptions out there we’d like to clear up. For starters, invoice factoring is not a loan. Fees are not astronomical and range anywhere from 1% to 5%. While a factoring company can help a struggling business, using one doesn’t mean you’re failing (on the contrary, it makes you savvy). Your customers won’t get harassed by factors and won’t see you using one as a turnoff. Factoring is not debt, like a bank loan or line of credit. 

By Natalia Garduño

March 5, 2020

Share this article

Blog

Invoice Financing, Explained

What is it, why it’s essential, and how to harness its superpowers.

Invoice financing keeps the lights on, ensures you stay afloat while competitors flounder, and is often the secret to small business growth. Sounds great. But what exactly does it entail? Here’s a deep dive into the funding strategy—you’re going to want to bookmark this. 

Invoice Financing (The Easy Definition)

Invoice financing unlocks the cash you have tied up in unpaid invoices. And it has multiple monikers: receivables finance, accounts receivables finance, and invoice factoring. The payment is immediate. Your company expenses get covered. Mission accomplished.

How It Works In 5 Steps

Somewhere in an unknown universe is invoice limbo. It’s a place where wilting accounts receivables float around while slow-paying clients do anything but rush to pay. Here’s where the invoice financing process begins. 

Step 1: Apply to a factoring company, get approved, and set up an account (sounds like three steps, but it’s so easy it feels like one).

Step 2: Sell unpaid invoices to factor company.

Step 3: Factor company advances up to 90% of the invoice amount to your bank account.

Step 4: Client pays the factor company when the invoice is due.

Step 5: You receive the remaining amount (minus any factoring fees).

What Makes Factor Companies Swipe Right

Like any good match, there are a few things to consider. The big one? Your customer’s creditworthiness. Which only makes sense since they’re paying the invoice. The average monthly revenue, at least the last three months, will also come into play. FYI, there’s usually a minimum. Lastly, your time in business. This variable can be a big advantage for startups and SMBs that have only been in the game for months. 

10 Best Reasons To Consider Invoice Factoring

  1. Fast cash. How fast? Think the same day or within 24 hours.
  2. You know when you are getting paid. Meaning you can make concrete plans for your business. 
  3. Working capital without debt and stress.
  4. Your staff will have time to do something other than chase down unpaid invoices. Finally.
  5. It’s a smart way to leverage customers with excellent credit since getting approval weighs more heavily on them than you.
  6. The number of invoices you factor is all up to you.
  7. There’s built-in flexibility as factoring arrangements accommodate your company’s needs.
  8. Factoring gives you more control over the flow of your cash…
  9. …and the resources to grow, invest, and grow.
  10. That opportunity you couldn’t fund yesterday? Today it’s a different, better story.

Invoice Financing Myths Debunked

There are a few misconceptions out there we’d like to clear up. For starters, invoice factoring is not a loan. Fees are not astronomical and range anywhere from 1% to 5%. While a factoring company can help a struggling business, using one doesn’t mean you’re failing (on the contrary, it makes you savvy). Your customers won’t get harassed by factors and won’t see you using one as a turnoff. Factoring is not debt, like a bank loan or line of credit. 

By Natalia Garduño

March 5, 2020

Share this article