One of the frustrations of running a growing business is waiting for customers to pay their dues. However, there will be times when your clients don’t pay on time. Delayed payments prohibit you from funneling your income back to your business right away, which limits your working capital. You won’t be able to pay bills, add inventory, pay short-term expenses, or keep your business operating smoothly.
With invoice financing, you don’t have to wait for days or weeks before your invoice gets paid. This type of financing enables you to convert your invoices into cash within 24 hours.
What Exactly is Invoice Financing?
Invoice financing falls under the asset-based lending category. There are two different types of invoice financing:
- The first type of invoice financing is similar to a business line of credit. The difference is that your business leverages on accounts receivable as collateral.
- The second type of invoice financing is called invoice factoring. This is when businesses sell their invoices to a third party – a factoring company or a private lender – in exchange for immediate cash. When you sell your invoices, your business or the factor has the choice of assuming the credit risk.
Invoice financing helps in bridging the gap between your business’ accounts payable and accounts receivable. With the funds you receive from your invoices, you can increase your working capital, take on more customers, and eventually grow your business.
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Who Can Qualify for Invoice Financing?
If your business has a business-to-business (B2B) model and if you have pending invoices, there’s a huge chance you can qualify for invoice financing.
Invoice financing is also perfect for businesses denied a traditional bank loan. Unlike small business loans, revenue, time in business, and profitability don’t matter as much. Your invoices act as collateral for the loan, so lenders only want to make sure that the invoices are sensible enough for them to finance. However, there are lenders who check your personal and business credit report, so don’t be too complacent.
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What are the Terms and Conditions of Invoice Financing?
The terms and fees that come with invoice financing depend on multiple factors such as strength and credit of your business, as well as the lender/factoring company you’re working with. But the most important aspect in determining the terms and fees would be the strength and creditworthiness of your customers.
For example, if you’re a food vendor and you sell your goods to a newly opened restaurant, factoring companies don’t think that the invoices have high value. This could potentially result in higher rates and less competitive terms.
On the other hand, if you sell goods to famous restaurants for a number of years, your invoices would be considered as high-value. This means that invoice financing companies would actually compete for your business.
If you need immediate access to cash, make sure to check out invoice financing. If you have any questions or clarifications, you can contact SMB Compass. Call us at (646) 569-9496 or email us at [email protected]. We’d love to hear from you!
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