Running a small business can be difficult. During a cash crunch, waiting on customers to pay their tabs is like waiting for grass to grow. To bridge the gap between expenses, consider cash advances with invoice financing.
In this article:
- What is invoice financing?
- Pros and cons of invoice financing
- Factoring vs selective receivables
- How To Secure A/R financing?
What Is Invoice Financing
Invoice financing, aka accounts receivable financing, allows you to exchange outstanding customer invoices for immediate cash. A lender will take over the invoice, and front you 80-100% of the balance. Instead of the customer paying you back, repayments are made directly to your lender. You will be charged fees on the cash advance, which vary based on the amount of time it takes for the customer to repay.
Pros And Cons Of Invoice Financing
Accounts Receivable financing is a short-term loan. But with a quick application you get access to cash for anything you wish, without being locked into a term loan. So leverage the value of your accounts receivables and go the distance!
It may seem like you are in dire straits when your bank account is almost negative. Your outstanding purchase orders can help bridge the gap between payroll and sales, or make those necessary loan interest payments.
Minimal credit check on the owner, lenders are more concerned with customer history
Immediate cash for small expenses
Not a traditional loan
Owe the invoice balance if the customer doesn’t pay back the lender
Not available to businesses using the cash accounting method
Discounted invoice + fees could amount to less than a bad debt expense write off.
Invoice financing isn’t only a band-aid to low cash flow. Even better, your invoices are your ticket to a new investment opportunity, like launching a new product line or snagging inventory materials on sale.
Factoring vs Selective Receivables
Not all invoice financing is alike. In your search for a lender you will encounter factoring vs selective receivables. Get familiar with what these different types of financing have to offer your business.
This is a popular choice for companies that have delinquent receivables. Instead of waiting around for customers to pay back POs, you offload them by selling them to an A/R financing company. The receivables are purchased at a discount rate, and the lender handles customer collections. With factoring you are no longer responsible for the risk associated with the clients invoice. It is a nice choice that helps you regain income from bad customer debts.
Accounts Receivable Financing aka Selective Receivables
As mentioned above, this is where you offer a selection of receivables to a lender. They advance you a certain percentage of the invoice value, for a low-interest rate and fees. Unlike other factor loans, you are responsible for collection efforts. Selective receivable financing is considered an asset sale, it is not reflected as debt on your balance sheet, therefore, it does not impact your debt ratio.
6 Steps To A/R Financing
Any method of financing can be scary. That’s why we put together these 6 steps to A/R financing to answer your questions about the application process.
1. Find A Lender
Select a lender that is a right fit for the type of A/R financing you are seeking. Some companies consider invoice financing and factoring the same thing, but they are very different. Don’t get locked into selling your invoices when you only want to select a few for a cash advance. Make sure to understand which service you are applying to. Here are a few companies we like:
They take on startups and small businesses with credit scores below 630, and with only 6 months business history. Fundbox allows you to pay them directly, versus having customers pay them.
Has a wider range of funding options. They cater services to businesses with higher credit scores and high book values.
This is a quick option that allows a seamless application and financing process. You integrate your QuickBooks directly to their platform so they can easily analyze and fund your selected invoices.
2. Select Receivables For Financing
Pick qualified invoices for the specific type of A/R financing you are going for. If you are factoring the lender will assess invoices for purchase. Factoring aside, choose clients with: a high business credit score, a history of paying you back on time, in full, and an invoice with an optimal balance to cash in.
3. Submit A Lender Application
Invoice financing isn’t like a traditional loan application. With all your ducks in a row, you can get approved fairly quickly. Have your identification documents, business history, balance sheets, bank statements, customer invoices + credit history, and accounting system integration capabilities ready.
Most lenders won’t require that you have a high credit score, they are more concerned about your customer’s credit score and will assess their billing history. Although the higher the credit score you have the lower the interest rates.
4. Receive Funding
Typical loans are around 70-90% of your total invoices. You receive the funding as if the invoices have been paid in your accounting system, the advance does NOT go on your balance sheet as a loan.
5. Inform Your Clients About Repayment To The Lender
It is your responsibility to address lender repayment with your clients. Some lenders understand the need for discretion and permit you to collect the invoices and pay them back directly.
6. Wait For The Customer To Repay
The longer it takes for the client to pay down their balance, the more you will pay against the loan. When they do repay, the lender will deduct any outstanding interest and fees from the invoice and pay you the remainder of the invoice.
Increase Your Cash Flow With A/R Financing
Accounts receivable financing is based on your customer’s creditworthiness. It is a way to increase cash flow for your business, especially when you don’t have the time or means to get a traditional loan. There are drawbacks to using A/R financing, so be sure to assess invoice quality and your financial position before applying with a lender.