What Is Invoice Financing and How to Use it for Business Growth

Receivable-Based Line of Credit

A receivable-based line of credit is established between a business and a lender. The value of the credit line is usually between 80% and 85% of the value of total accounts receivable. 

As payments for invoices are collected, the balance owed by the business is reduced. The company retains the right to collect invoices from its customers. In this arrangement, fees are usually less than those that are available under invoice factoring or invoice financing arrangements.

Pros of Invoice Financing

As with all types of financing, invoice financing has advantages and disadvantages. The pros of invoice financing include:

Fast Access to Cash

Entering into an invoice financing arrangement can provide your company with very quick access to working capital. This access can reduce the risk of missing important payments such as payroll or supplier invoices. Funding is usually provided within 48 hours.

Alleviates Cash Flow Problems Due to Slow-Paying Customers

It can be extremely frustrating to wait on payments from customers who are slow to pay, especially if they make up a large part of your company's accounts receivable balance. Invoice financing can provide a sense of regularity to the collections process and reduce problems caused by late-paying customers.

Easier to Qualify for than a Loan

This ease of access is especially important for small businesses that haven’t been open long enough to generate credit or that have financial problems. Invoice financing doesn’t require a credit check on the business or its owners. Instead, financing is granted based on the value of the invoices and the customer’s history of payment.

Low Cost if Payment from Customers Received on Time

If you have customers who pay their bills on time, the cost of invoice financing will be relatively low. There will be no need for excess efforts by the lender or your company to collect payments due from a customer on your behalf.

Optimal for B2B or Seasonal Companies

Invoice financing is most appropriate for businesses that sell to other companies or for those who operate in seasonal industries. It is generally very easy for these types of businesses to qualify for invoice financing.

Cons of Invoice Financing

There are a few cons associated with invoice-based financing. These include:

Can Be Very Expensive

While the upfront fees may appear small, costs associated with invoice financing can be quite expensive. 

Lenders typically charge a percentage of the invoice each week until it is paid. Fees may range from 1% to 5%. If a company is very slow to pay, the overall value of the invoice can be significantly reduced. It is not uncommon to see fees as high as 50% due to slow-paying customers.

Difficult to Evaluate Upfront Costs

Since the cost of invoice financing is determined by the length of time it takes a customer to pay, it can be difficult to conclude how much it will cost. 

Not an Option for B2C Businesses

Since businesses that sell to consumers typically collect payment at the point of sale, invoice financing is usually not available to them. These types of companies will need to consider other types of financing if they encounter cash flow difficulties.

How to Know if Invoice Financing Is Right for Your Business

Deciding whether invoice financing is right for your business requires a lot of consideration. It is important to have a clear understanding of your customers' paying habits and of lenders’ invoice financing agreements. 

You should have an awareness of how much invoice financing will cost your business and if it will impact relationships with your customers.

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