Invoice Financing for Small Businesses
There’s no doubt waiting on unpaid invoices puts your business in a cash flow crisis which can cause long-term harm to your company. Invoice financing for small businesses (also called invoice purchasing) is one way a company can speed up getting paid for outstanding invoices—especially when cash flow is low.
Every business struggles with cash flow from time to time, and that’s typically when business owners search for the best solutions for their companies. But while invoice financing for small businesses is one viable solution, is it the right solution for your business since it comes with high fees and a strict approval process?
What is Invoice Financing for Small Business?
Invoice financing is a loan that is based on the amount of a business’s outstanding invoices. Invoice financing companies rarely make loans for the full invoice amount of the invoices. Instead, depending on the company’s profile and the amount of the invoices, they loan about 80-90% of the value of the invoices.
Some companies do single invoice financing, usually on an invoice with significant value to receive some money right away, get over a financial hump, or if the customer is known to pay slowly. Invoice financing is not the same as purchase order or PO financing. PO financing is based on purchase orders received from customers instead of the invoices sent by the company. Purchase order loans are distributed with the understanding that once the product or service is delivered to the customer, the customer will pay the promised amount in the purchase order, and the PO finance company will recover its investment plus any agreed-upon fees. Invoice financing for small businesses is also slightly different than invoice factoring for small businesses.
Invoice Financing vs. Factoring
The most significant difference between invoice financing for small businesses and small business invoice factoring is which party in the agreement collects on the company’s unpaid invoices. Invoice funding companies require the borrower to collect on the invoices and then pay the agreed-upon fees. In small business factoring, the factoring company actually purchases the business’s unpaid invoices, makes the loan, and then collects the invoices. Factoring for small businesses means your customers will know their invoice has been sold to a financing company and might create the perception that your company is struggling. However, since your company still retains collection responsibilities with invoice financing for small businesses, the customer never knows a third party is involved.
When searching for the best short-term invoice financing for small businesses, don’t only look for the invoice financing with the shortest approval time, but pay close attention to the fees required by the lenders. Also, invoice factoring costs tend to be more than invoice financing because the factoring company must collect on the invoices. However, if you don’t have time to track down payments, factoring might be worth the extra fees.
Because the invoices themselves act as collateral for the loan, there is typically not as cumbersome an approval process as with a bank loan. Also, invoice financing can be a feasible solution if the company has a less-than-great credit score or does not own significant assets. Be aware; not all invoice types are eligible for invoice financing for small businesses. Lenders want to collect from companies with stable track records, not individual customers. Although lenders don’t care as much about your company’s credit score, they will care (and check) the credit score of your business customers.
Invoice Financing for Small Businesses vs. Business Line of Credit
Another solution available to small businesses facing a cash flow crunch is a business line of credit. Unlike invoice financing for small businesses, a small business line of credit does not depend on the value of your unpaid invoices, and it does not require any collateral to back up the loan in case of default.
If time is a factor for getting an infusion of cash, a small business line of credit also can be approved quickly, and your business will have access to the loan in a matter of days.
A small business line of credit provides an ongoing source of funds available to your company for whatever needs occur in the operation of your business. While some short-term loans dictate what the loan can and can’t be used for, a small business line of credit can be used for office repairs, buying equipment, meeting payroll, or other financial needs. In addition, the business line of credit application process is simple and requires minimal documentation and preparation.
A line of credit is often used to help even out cash flow. Having extra cash on hand is crucial to help small businesses get over a crisis and back on track, especially in a seasonal slowdown or unstable economy.
Once the application has been approved, the money is a revolving credit line, like a credit card line. The entire loan or smaller amounts are available to the company when needed—in essence, you are borrowing on your own loan. When money is borrowed, fees are only charged on the money that has been withdrawn. Then, when the money is repaid to the line, the funds are available again—without applying for a new loan. Also, when the line is back to its total amount, the costs are zero for the borrower. To sum it up: Borrowers draw funds when needed, pay the money back, and have the money available again for the next need.
With the Financing Solutions Line of Credit, business owners always have the benefits of a more straightforward application process, plus:
- There are no costs to set it up or keep it in place
- The easy 2-minute application online application
- If approved, you’ll receive a same-day, no-obligation offer letter
- The fastest setup, 48-72 hours
- Once you have the line of credit, requests for funds are wired to your bank in minutes
- You can use your line of credit whenever needed
- Inexpensive when used (low fees)
- There are no restrictions in place or collateral required
- No personal guarantee is required, either
- Financing Solutions is a leading provider of lines of credit
- We are a reputable company with an A+ & 5-star rating
- You can pay off the line whenever you are ready
- The credit line is easy to renew and renews yearly
- You have a secured account portal access 24 x 7
A business line of credit is a good funding resource that’s available whenever your company needs it, without selling your invoices to an invoice financing company. If you want to see if your business would be approved and for how much, please fill out the no-obligation, 2-minute line of credit application here.