by Gerri Detweiler
Invoice financing is a common financing option for businesses that get paid long after they deliver their goods or services. It helps with managing cash flow, especially when you need working capital or have timely opportunities to reinvest in your business. There are three types of receivable financing: invoice factoring, invoice financing and receivable based lines of credit.
- 1 Invoice Factoring is a common financing option for industries like clothing or manufacturing, where long accounts receivable are part of the normal business cycle. Factoring works by providing a cash advance based on the total value of the invoices. You typically receive 50-80% of the invoice value up front based on the risk profile of your clients. You receive the remaining value once the client pays off the invoices, minus a factoring fee. This fee can be structured in any number of ways, but it generally nets out to be about 3-5% of the invoice value.
- 2 Invoice Financing is like factoring except that it’s not a sale of your accounts receivable. You use the account receivables as collateral to get the advance and you are ultimately responsible for managing the customer relationships and payments. If your customers becomes delinquent, you will be responsible for the amount you advanced. The fees are usually 2-4% of your invoice value per month.
- 3 Receivable Based Line of Credit is a credit line based on a percentage (usually of 80-85%) of value of your outstanding invoices. The value is calculated based on the *aging* of the invoices. Namely, they give a full value for current invoices and a discount for overdue invoices. You will pay a pre-negotiated interest rate based on your balance. When an invoice gets paid, your balance will be reduced. There’s usually a fee when you draw the credit line. But this is usually a cheaper option than invoice factoring or invoice financing with APR less than 20%.
Invoice Financing Offers
What You Need to Know About Invoice Financing
|Fast approval, minimal paperwork||Relatively high rates|
|Helps mitigate cash flow emergencies||Need invoices as proof/collateral|
|Transparent, easy-understandable pricing||Generally doesn’t work for B2C businesses|
Best Candidates for Invoice Financing:
- B2B Businesses
- Seasonal Businesses
- B2B Businesses with Big, Well-Respected Clients
- Businesses in Industries with Long Billing Cycles — e.g. Clothing, Retail, Manufacturing, etc.
- Businesses with Large Invoices
Industries that are best suited for invoice financing include:
- Real estate
- Healthcare services and medical suppliers
- Marketing services
- Business consulting and legal services
Invoice financing is not a great fit for business-to-consumer (B2C) companies or subscription-based revenue companies.
The overall APR, typically 15-35%, is high compared to that of banks or online term lenders. But it’s a good short-term solution, when most of your short-term assets are tied to accounts receivable, that lets you avoid the lengthy bank loan application. It’s also much better compared to expensive merchant cash advances. Your credit score also doesn’t matter as much. Your clients’ credit scores will also be taken into account. Therefore, it’s a good solution if you have receivables but haven’t built up your credit enough to get a credit line from a bank.
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