Invoice Finance for Small Businesses 

The recent Covid crisis has put a lot of small businesses out of work. It is estimated that at least 40% of small businesses were temporarily closed due to COVID-19, and about 20% shut their doors permanently. Moreover, the aftermath of the pandemic has left us in a cost-of-living crisis, and inflation is higher than it was in decades. However, this does not mean that all small businesses are in trouble, this just means that you have to be crafty when it comes to financing if you want to secure your cash flow and focus on growing your company. Invoice finance may just be the right thing for you. 

What is Invoice Finance?

Instead of chasing your clients for money, or sitting on a bunch of unpaid invoices, with Invoice Finance, you get a quick cash injection, which helps you establish a steady cash flow. Oftentimes, clients do not pay for a product or service immediately, but it can take several months until you receive money. Invoice finance companies loan you a large percentage against your unpaid invoices, and in return, they take a small fee for their services. Think of it as a revolving credit line or a series of short-term bank loans, just without the hassle of having to wait for the approval. And it operates just like an on-demand cash advance against your invoices as collateral, so you do not have to offer any of your assets as collateral, or a personal guarantee.

How does it work?

With this type of financing, you issue an invoice to your customer, and you receive a percentage of the invoice value as a loan from an invoice financing company. The percentage you receive depends on the specific payment terms agreed upon with your lender, but it usually ranges between 75 to 95 percent, and it usually arrives a couple of days after the invoice was submitted. This is why solving cashflow issues with Invoice Finance is a smart idea. After your clients make a payment, the interest fees are taken out of the sum, and the rest is given directly to the wholesaler after the lender has recouped the loan. However, there is another type of invoice financing, called invoice factoring.

What is invoice factoring?

There is not much difference between invoice financing and invoice factoring, so much so that people often get those two mixed up. But there are differences that should be accounted for. The main difference between invoice factoring and invoice financing is who collects the payment from your customer. With invoice financing, the payment is collected by the wholesaler, and they are responsible for chasing their customers for payment. With invoice factoring, you sell your unpaid invoices to a factoring company and they are the ones that ultimately receive the payment from your clientele. The problem with this type of financing is that the factors charge you much more for each invoice, usually up to 10 to 15 percent as their fee, but sometimes the fees can rise to a staggering 40 percent. Just like an invoice financing company, they offer you a percentage of your unpaid invoice upfront and give you the rest once your customer pays off their debt, minus the fees and interest. Unlike invoice finance, the factoring company is in control of your sales ledger, and the customer knows you are borrowing against unpaid invoices since the factor is the one who collects the unpaid bill. 

Invoice finance is confidential, while invoice factoring is not. This can be a double-edged sword, since, on one hand, you can level it up to the factor to collect the money from your customers and you can focus on growing your business, but ‌you are not in full control of customer service, so your clients may have a negative experience when dealing with the factoring company, and may be hesitant to continue doing business with you. Factoring companies are usually “pickier” when deciding whether or not they will pay for the invoice – some factors require that your clients have excellent credit scores and reputations, and they may require you to prove that your clients will pay for their invoice. 

Also, remember that factoring companies charge several additional fees, like account setup fees, monthly minimum volume fees, renewal fees, etc., which may not be as clearly specified upfront, but require additional digging. With invoice financing, the fees are much smaller, since you are still responsible for collecting the money from your customers.

Is invoice financing a good idea?

Whether or not you should consider hiring an invoice financing company is not so easy to answer. Depending on your business, costs, and financial circumstance, you may find that other financing options help you manage your financials better, and one method is not superior to the other for every specific situation. Invoice financing works best if you have a small business that needs constant cash flow with easy access, and your customers must be other businesses. Additionally, you have to be aware of long-term costs, like interest rates, processing costs, and any other hidden fees, which can add up over time. The size of these fees is calculated daily, and it depends on how long it takes your customer to pay the invoice and their credit score, so be careful about who you choose to finance this way. 

However, the benefits are that you do not offer any other assets as collateral. You can freely invest in new business opportunities since you have regular cash injections that offer you a chance to grow your company. And since invoice financing approval largely depends on the financial strength of your customers, their payment history, and the terms of your invoices, your own credit score should not be an important factor.

If you are a business that needs a flexible solution to your cashflow problems, and the higher costs of this type of financing is acceptable for your company, then invoice financing solves all your problems. Just remember, invoice financing is meant to help you manage your finances, and it is not meant to replace poor revenue. You are still supposed to be successful in securing new sales and new invoices. Invoice financing lets you be in charge of your sales ledger and customers, and works more like a short-term loan, with money being available to you much faster than with any other financing alternative.