Invoice financing is a way to alleviate some of the stress by allowing businesses to borrow money from a lender based on amount of money due from customers. With the right financing, businesses can grow on their own schedule.
With invoice financing, businesses can use money owed to them as a loan asset, enabling them to get paid for outstanding invoices right away. That means businesses don’t get stuck waiting for or chasing clients. Invoice financing helps improve cash flow and can be used to pay employees or suppliers, cover slow periods or take advantage of growth opportunities.
Invoice financing is also known as accounts receivables financing. It is essentially, a secured loan as you are using your outstanding invoices as collateral for the loan. If approved, businesses generally receive about 85% of the value of their invoices, with most of the other 15% paid at a later date. The total loan amount depends on the amount owed to your business and the creditworthiness of your customers.
There are several benefits of using invoice financing to cover cash flow shortages or better manage late payments. Here are a few:
There are three main types of invoice financing that may be available to small businesses:
The process of applying for invoice financing is fairly easy and is typically less difficult than a traditional loan:
Is there a difference between invoice financing and invoice factoring?
The main differences between invoice financing and factoring come down to three elements: flexibility, control, and confidentiality. With invoice financing, you get to choose which invoices to finance and when, plus you usually deal directly with the customer for repayments. Because of this, customers typically won’t know you are using a financing company. On the other hand, invoice factoring requires invoice amounts to typically be advanced in the order received, plus the factoring company will usually have a debt collection service to retrieve unpaid invoices on your behalf. This allows for less confidentiality, as a customer will generally know you’re using a factoring company once they are contacted by this third party.
What collateral is needed for invoice financing? Do I have to provide anything else?
For invoice funding, the only collateral you need to provide is your outstanding invoices. Depending on the company providing you with invoice financing, you may also need a General Security Deed (an agreement between you and the lender) and a Director’s guarantee and indemnity. Always ensure you know everything that is required of you before you pursue financing.
Are there any fees associated with invoice financing for small businesses?
Depending on who you receive invoice financing from, you may be asked to pay fees relating to set-up, service, and finance.
What should I be aware of in relation to invoice funding?
There are many things you must take into consideration before you choose an invoice financing company. Do they offer month-to-month contracts so you can switch if their services are unsatisfactory? Is the company financially sound enough to support your business growth? It is also vital to make sure the company is familiar with the laws related to invoice financing.
My company has recently experienced rapid growth. Would invoice financing be a viable option?
For an SME to continue growing, they often need quick access to financing. Invoice financing is just one viable funding solution for businesses. To find out about a wider range of financing options, visit our Business Loans page.
Still not sure if invoice financing is right for you? Compare other types of loans to learn more.