Many small businesses and entrepreneurs need a loan for growth. Traditional finance used to provide slow, and cannot deliver quick credit. For small and medium enterprises (SMEs), invoicing financing is popular, as it has no physical asset collateralization. Within a short period, you get the invoices.
What is Invoice Financing?
Invoice financing is known as receivables financing or invoice trading. It is a form of an asset-based loan. Against outstanding invoices from customers, it allows businesses to borrow money. For fast access to cash in return, a business has to pay an invoice finance company a fee.
Eligibility for Invoice Financing
To qualify for invoicing financing is much easier than comparing it to other business types of loans. Any small business with a business-to-business model is eligible for invoice financing, at a basic level.
However, to meet invoice financing will vary based on the individual lender or company, there are some requirements that you will need.
Here are a few of the things that you might have to consider during the invoicing financing. It is for determining whether or not you qualify for invoice financing:
- With invoice financing, traditional business loan requirements may not be important.
- Lenders will likely look at factors like your credit score, annual revenue, and time in business.
- In this case, as with all types of financing, you are more likely to access invoice financing with the ideal rates and terms when you have strong business qualifications.
- Customers’ repayment history.
- The quality of your invoices.
How to Apply for Invoice Financing?
Once you meet the eligibility criteria, you need a right, and start with the application form.
Compared with more traditionally structured loans, like SBA loans, invoice financing applications are usually fast and easy. Your invoices themselves will be an important part of the application process because your invoice or invoices will largely determine the amount and terms of the financing you qualify for.
Depending on the lender, you must submit additional information about your business and finances, such as:
- Driver’s license
- Business bank statements
- Void business check
- Personal and business credit scores
- Business financial statements
To complete the application, it takes a few minutes of invoicing financing. Some companies, allow you to connect to their platform so that they can more easily evaluate your qualifications and your business’s accounting software, as well as other tools.
Many invoice financing companies transfer your funds within a few days and make you an offer too.
Industries that are best suited for Invoice financing
- Real estate
- Retail Manufacturing
- Business consulting and legal services
- Healthcare services and medical suppliers
- Agriculture Marketing services
Types of Invoice Financing that everyone must know- Invoice Factoring
One of the most common types of invoice financing that small businesses apply for is invoice factoring. In this arrangement, outstanding invoices are sold to factoring companies. The merchants are the borrowing party. Full control of the company’s invoices is taken care of by the financing company that does the payment collection. The financing company then deducts the cash advance plus the fees, once the customers pay the invoices. Therefore, the remaining balance is sent back to the business.
You will not have to deal with payment chasing, which is one of the main advantages of invoice factoring. The companies do not have enough resources to do the payment collection themselves, this is especially true for them.
There are further two types of invoicing factoring:
- Recourse factoring
- Non-recourse factoring
One of the most commonly used forms of invoicing factoring is Recourse Factoring. In this case, you will be responsible for the payments if your customers default on their invoices. It means the business is ultimately responsible. The factor fee is low, so it is much cheaper for the customer. Hence, a credit profile evaluation accepted by the seller is generally easy as the seller already has a relationship with its customer /borrower.
In non-recourse factoring, the full risk of the invoices is undertaken by the lending company. In simple words, the factoring company has to take the loss and shoulder the costs if the invoices remain unpaid. For companies that have strong financials and reliable customers, non-recourse factoring is the best option. The factor fee is high.
Pros and Cons of Invoice Financing
Before considering invoice financing, you should be aware of its pros and cons, and make a decision accordingly, whether it is suitable for you or not.
- Fast approval minimal paperwork
- For cash flow emergencies, it helps mitigate
- If your customers pay on time, then they have to pay a low cost
- It has relatively high rates/cost
- For proof/collateral, need invoices
- For B2C businesses, it generally does not work
- If customers are late for the payment or do not pay at all, then it can be expensive and risky
Therefore, for B2B and service-based businesses, invoice factoring is the best option. You can receive invoices in less than 24 hours. It is the best option to improve the cash flow and services of the company.