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Invoice Financing: Breaking Down the Basics and Real-World Success Stories
Cash flow issues can feel like an uphill battle for many business owners, especially when you’re waiting on unpaid invoices. We get it – as both both finance leaders and entrepreneurs ourselves, we know all too well how cash flow can make or break a business.
As traditional methods like lines of credit become more time-consuming to get and banks are tightening lending to SMBs, alternative finance options are becoming popular. Among these, invoice financing and receivables financing stand out as practical solutions. In this guide, we’ll explore the details of this type of financing, and compare it with other options for businesses. To give you a clearer picture, we’ve added real stories from small and medium companies, showcasing their firsthand experiences with these invoice funding.
What is Invoice Financing?
Invoice financing is a financial solution that allows businesses to advance cash based on outstanding invoices, providing immediate liquidity and bridging the cash flow gap while waiting for clients to pay. Often, the terms “invoice financing” and “invoice factoring” are used interchangeably, though they have subtle differences. Invoice factoring involves selling your unpaid invoices to a third party at a discount, whereas invoice financing typically lets you borrow against those unpaid invoices without necessarily selling them.
What's the Difference Between Invoice Financing vs Invoice Factoring?
Managing financial options can be tricky, and knowing the subtle distinctions between similar-sounding terms is crucial in making informed decisions. Let’s clarify the differences between invoice financing and invoice factoring to help you pinpoint the right solution for your business. You can also go even deeper into the topic and read about the differences here.
How Does Invoice Financing Work Compared to Invoice Factoring?
| Invoice Financing Process | Invoice Factoring Process |
|---|---|
| 1. Create or connect your account in minutes, either directly or by linking QuickBooks or OpenInvoice. | 1. Create or connect your account in minutes, either directly or by linking QuickBooks or OpenInvoice. |
| 2. Select invoices you'd like to fund. Upload them or sync through accounting software integrations. | 2. Select invoices you'd like to fund. Upload them or sync through accounting software integrations. |
| 3. Financing company advances the amount for the selected invoice(s). The repayment structure and fees are agreed upon upfront. | 3. The factoring company provides an upfront payment (less an upfront fee). |
| 4. Your customer pays you based on the original invoice terms. | 4. Your customer pays the factoring company directly based on the invoice's terms. |
| 5. You repay the financing company according to the agreed-upon structure and terms (plus fees). | 5. You do not owe the factoring company a payment, as your customer is the one who has paid them. |
Now that we’ve looked at the details of invoice financing and invoice factoring, it’s clear that while both methods aim to alleviate cash flow issues, the mechanisms and benefits of each differ in several crucial areas. To deepen your understanding and help you make an informed choice for your business, we’ve broken down the key differences between the two:
| Invoice Financing | Invoice Factoring | |
|---|---|---|
| Speed | In days, with platforms like FundThrough providing next-day payments upon approval. | In days, including initial set up. |
| Funding amounts | Varies by partner, typically 80-95% of invoice | Advances the full invoice amount, less fees (at FundThrough) |
| A/R collection responsibility | You remain responsible for collecting the accounts receivable from your customers. (You have to go through the trouble of getting your customers to pay you). | The factoring company takes over the responsibility for collecting the accounts receivable. (Your customers pay them directly). |
| Cost | Predetermined fees based on the duration the money is borrowed. | Factoring fee is a percentage of the invoice's total value. For example: 2.75% per 30 days, tiered for longer durations (See our pricing) |
| Repayment | You repay the financing company directly, with weekly repayments or after your customer pays you based on the original invoice terms depending on your partner's policies. | Your customer pays the factoring company directly. |
The Pros and Cons of Invoice Financing
Invoice financing can be crucial for businesses that need to maintain a steady cash flow, especially when their clients take a long time to settle invoices. But like any financial tool, it comes with its advantages and drawbacks.
Pros and Cons of Invoice Financing
| Pros | Cons |
|---|---|
| Customer Not Involved: There's no third-party interference in your business-customer relationship. | Everything’s on You: You are responsible for payment, not your clients. This means managing repayments like any other loan. |
| Can be Faster than Factoring: The approval process can be shorter since the customer isn't involved. | Smaller Capital Limits: Typically, the amount of funding available might be limited (compared to factoring). |
| Convenient Access to Working Capital: Provides quick solutions to cash flow issues, aiding in funding payroll or business growth projects. | Immediate Repayment Requirement: Immediate repayment obligations could worsen cash flow problems. |
| Easy Process: Modern features like AI and accounting software integration can make the process seamless, reducing paperwork and expediting access to capital. | Potential Hidden Costs: Some providers might have fees or terms that aren't immediately transparent, requiring businesses to be vigilant and thoroughly review agreements. Always ensure you partner with a financing company that is transparent about fees! |
Alternative finance options are becoming increasingly popular and pivotal for many startups and small businesses. Sheena Russell’s journey with Made with Local paints a bright picture of a growing business dealing with the challenges of expansion. With invoice financing solutions like FundThrough, they managed to bridge the cash flow gap created by their policy of paying suppliers immediately while waiting for their own invoices to be paid. It wasn’t just a financial strategy; it was a means to uphold their values, stay agile, and make informed decisions that furthered their growth and impact.
“Consider the effects of having more cash in the bank on your mental health, as an entrepreneur. Money is energy in business. If you have more money in the bank, you are more open to creativity and to bigger ideas.”
— Sheena Russell, Owner and Founder of Made with Local
Ready to fund an invoice?
Invoice Financing Examples
Ensuring a steady cash flow can be a critical component for many businesses owners, especially when grappling with the challenges of extended payment terms from clients. Invoice financing can be a timely solution for these kinds of situations. Here are some real-world examples and shed light on the power and impact of what quick cash from invoice financing can do.
MapleX Naturals, a promising brand in the personal care sector, confronted the tough realities of extended payment terms from prominent retailers, especially during the unpredictability of COVID-19. With some net terms stretching up to 150 days, the need for swift cash flow was evident. Turning to FundThrough’s invoice financing, CEO Dave Thompson explained the tangible benefits:
“Knowing that the factoring is available, I can fund it at 60 days, or I can fund it after 30 knowing that I have that option… It gives us the confidence to go forward with cash flow to cover immediate expenses.”
The immediate impact? MapleX Naturals was able to nurture solid supplier relationships, cater to surging demand, and set the stage for considerable growth.
Business hurdles can be varied and many, but as MapleX Naturals demonstrated, with the right solutions like invoice financing, overcoming them becomes significantly more manageable. This type of financing can also positively affect businesses in a variety of industries, from apparel to companies in the oil and gas sector.
Global Pipeline: Powering Through Energy Contracts
In the high-stakes world of energy, Global Pipeline was staring at a game-changing contract, but their challenge was twofold: Meeting the demands of this massive project and simultaneously managing their regular clientele. The substantial gap between service delivery and payment posed significant challenges, especially with the magnitude of their new project. By opting for invoice financing, they could mobilize the necessary resources instantly. The CEO shared:
“Invoice financing was the jet fuel we needed. It not only enabled us to take on a project of this scale but also reassured our regular clients of our unwavering commitment to them.”
With timely financial support, Global Pipeline executed their largest contract seamlessly, reinforcing their reputation for reliability and excellence in the sector.
These examples highlight the pivotal role of invoice funding in business finances. Whether it’s fulfilling supplier demands, addressing production costs, or capitalizing on expansion avenues, the continuous flow of cash is indispensable. Invoice financing, be it factoring or direct financing, emerges as a strategic cornerstone for B2B businesses. It’s more than just an option for businesses; it’s a transformative tool that empowers them to sail smoothly through challenges and harness growth, regardless of market ebbs and flows.
Ready to fund an invoice?
How to Qualify for Invoice Financing
Qualifying for invoice financing doesn’t have to be particularly challenging. In fact, many businesses find the process with financing companies like FundThrough to be fairly straightforward. The key to a smooth and speedy experience lies in having all your documents ready from the outset. With the right preparations in place, it’s easy to find out if your business is a good fit for invoice financing (or factoring).
Step 1: Set Up Your Account
Either create a free account with FundThrough or connect your existing QuickBooks or OpenInvoice account. The initial setup is designed to be quick, taking just a few minutes. See if you qualify in less than five minutes.
Step 2: Gather Necessary Documentation
To streamline the process, have the following documents at hand:
- Business formation documents (e.g., LLC certificates, Articles of Incorporation, or other proof of your business’s legitimacy).
- A government-issued photo ID such as a driver’s license or passport.
- A void check from your business checking account.
- Authorization permitting FundThrough to review your business’ tax history.
Be aware that FundThrough may request additional information to further verify the authenticity of your business and your clients.
Step 3: Select Invoices
In the FundThrough platform, upload your invoices or connect your Quickbooks or Enverus to pull them in. Choose the invoices you’d like to fund. You’re never obligated to fund a certain number of invoices.
Step 4: Get Funded
See working capital in your bank account the day after full approval, and get back to running your business.
Ready to fund an invoice?
Unlike a traditional bank loan, where your time in business and personal credit often play a dominant role, invoice financing shifts the focus to your creditworthy customers. Even if you have bad credit, the emphasis is largely placed on the creditworthiness of your customers. As long as you present eligible invoices reflecting completed work for these customers, you’re already on the right track. So, if your business aligns with the aforementioned requirements and you have unpaid customer invoices ready, you’re potentially an excellent match for FundThrough.
How FundThrough Can Help Fund Your Invoices
Traditional loans often come with cumbersome paperwork and extended wait times, leaving businesses hanging in the balance when they need access to cash the most. But what if the application process could be streamlined through technology? This is where FundThrough shines in the vast sea of invoice financing companies. As you explore your options for invoice financing versus factoring, we’re here to shed light on the process and simplify your journey.
Here’s why partnering with FundThrough is a game-changer:
Customer-Centric Approach: With invoice factoring, we ensure professional interactions, valuing and respecting the hard-earned relationships you’ve established with your clientele.
Quick & Easy: Our processes are designed for swift approvals. By integrating with accounting software, employing AI, and automating various processes, we’ve reduced paperwork and wait times, ensuring you gain access to funds promptly.
Flexible Funding: Get unlimited funding – as much as you have in accounts receivable. There’s no requirement to fund all of your invoices. You are free to choose which invoices to fund, and you can get an easy boost of funding anytime.
Empowering Growth: Cash flow challenges shouldn’t hold you back. Financing invoices enables you to meet immediate financial obligations and also seize growth opportunities, from fulfilling large orders to ramping up services.
For many business owners, the strain of delayed payments is a constant challenge; countless professionals wrestle with cash flow dilemmas. But it should give you some peace of mind to know that with alternative finance options like receivable financing and invoice factoring there are more cash flow solutions than ever.