When you need working capital without delay, borrowing against your unpaid invoices is a short-term cash flow solution worth considering.
Waiting 30, 60 or even 90 days to collect on goods and services rendered is challenging enough for small businesses, without the added stress of late payments. Unfortunately, delayed payments are all too common, with one in every 10 invoices paid late.
While there are several steps you can take to get paid faster, sometimes your business needs the funds you’re owed right away. So what can you do when you need working capital for immediate expenses, and can’t wait to collect on unpaid invoices?
Enter invoice financing, also known as accounts receivable financing. This type of loan allows you to borrow money against the amount your customers owe you. In other words, you can finance your unpaid invoices to get the cash you’re due now — without having to wait for your customer to make the payment.
How It Works
When you finance an unpaid invoice, you’re essentially getting a cash advance on the invoice, which serves as collateral. So what does this convenience cost you? You’ll pay the lender a percentage of the invoice in return for the loan. Lenders generally advance around 85 percent of your invoice right away, and you’re paid the remaining 15 percent once your customer pays their invoice.
There’s often a processing fee, plus a percentage that’s generally calculated on a weekly basis (somewhere around 1 percent per month). The longer it takes your customers to pay their invoice, the more interest you’ll pay.
When to Consider Invoice Financing
Invoice financing offers a short-term solution to cash flow issues. It’s an option to consider when you need cash immediately, and can’t afford to wait for your customers to pay their invoices. This type of financing often makes sense for companies that face long payment cycles, or for seasonal business swings.
Whether you need funds to cover operating costs, pay your employees or support a growth opportunity, invoice financing is a fast, convenient way to access cash. How fast? Many accounts receivable loans are processed in as little as a day, and with FINSYNC you can turn your invoices into cash in just one click.
Beyond the speed and simplicity with which you can access funds, invoice financing is worth considering for startups and businesses that may have a difficult time securing other types of loans. With invoice financing, your customer’s credit score is given more weight than your own.
In stark contrast to the approval process for traditional small business loans, accounts receivable lenders are looking mainly for unencumbered accounts receivable from clients with good credit. Your own credit history, cash flow and business outlook are secondary.
Advantages of Invoice Financing
Invoice financing offers many advantages, several of which we’ve already mentioned. They can be easier to qualify for than other types of loans. You get funds fast and approval is generally based on your customer’s credit rather than your own.
Startups with a limited history often have an easier time qualifying for invoice financing, as there’s less emphasis on cash flow and revenue. Generally, three to six months of business history is sufficient, and the only collateral you’ll need is the invoice itself.
The other obvious advantage is the time you’ll save waiting for payments. Getting the money you’re owed immediately can help you avoid cash flow issues. It may even help you take advantage of timely growth opportunities.
Other Factors to Consider
When you factor an invoice, your client is usually notified — which can be uncomfortable for both you and your client. With FINSYNC’s invoice financing, your customer will never be informed about the transaction, as we are also a payment processor.
Invoice financing can be more expensive than other types of loans. The rates and fees tend to be higher in return for fast, easy access to cash. They can also be somewhat unpredictable. Since the fees are based on the time it takes for the invoice to be paid.
Repayment terms are often shorter for invoice financing, generally around 12 weeks. And don’t forget that you’re still dependent upon your customer’s payment; if they don’t pay you, it’s still your responsibility to pay back the loan.
Keep costs down and minimize your risk by repaying the loan quickly. Only finance invoices from clients with a solid repayment history.