Understanding the Difference Between Invoice Factoring and Invoice Financing
Accounts receivables financing companies advance you cash collateralized by your businessâs outstanding invoicesâgiving you an excellent way to put more money into your business right away. With invoice financing, you could get a fast advance of about 85% of the value of your invoices, with most of the other 15% paid to you later. Itâs the perfect solution to cover for late-paying customers or cash flow slowdowns.
Approx. 50 to 90% of the total invoice amount.
When customer pays the invoice, you receive the remaining 10-50% reserve amount, minus the fees.
Approx. 3% + %/wk outstanding
As little as 1 day
Any business with a business=to-business model can qualify for invoice financing, as long as they currently have outstanding receivables.
Hereâs the deal.
These lenders donât care as much about your revenue, profitability, or time in business.
Since your invoices will act as the loanâs collateral, lenders just want to make sure the invoices make sense for them to finance. The rest of your business isnât too important.
The maximum amount you can qualify for depends on the total amount and quality of your invoices, as well as on your creditworthiness.
It is important to note that some accounts receivable financing lenders take a look at your credit report, too.
**Based on past Fundera customers.
One of the most frustrating aspects of running a growing business is waiting for your invoices to be paidâespecially when some customers donât pay on time.
And delayed payments mean you donât get to funnel that capital back into your business right away, tying up your working capital and creating a whole host of trouble.
At Fundera, we see this problem all the time with small business owners. Thatâs why we offer accounts receivable financing on our marketplace.
With accounts receivable financing, you have the chance to get paid for your invoices right awayâno need to wait.
Letâs learn more about how it can help.
What if you could guarantee youâll see cash for those invoices right away?
Thatâs essentially what accounts receivable financingâalso known as invoice financingâcan do for your business.
While accounts receivable financing is sometimes a fairly expensive way to fund your business operations, it lets you deal with a more predictable cash flow. If youâre running short of capital or urgently need to meet upcoming expensesâlike taxes, payroll, or even getting started on your next projectâthen invoice financing can ease the burden on your business.
Plus, youâll definitely sleep better at night with a reliable inflow of cash.
Once you agree to collateralize some of your invoices for a loan from a financing company, theyâll advance you typically about 85% of the total value of those invoices.
The remaining 15% gets held in reserve and subjected to fees until your customer pays their invoice off.
From that 15%, your lender first collects a processing feeâoften around 3%. Theyâll then charge a âfactor feeâ that depends on how long it takes for your customer to pay up, almost always calculated on a weekly basis.
For example, many lenders charge 1% each week until payment.
Then youâll receive that 15% minus those feesâwhich are essentially the price youâre choosing to pay for cash now instead of whenever the customer can complete your invoice.
Accounts receivable financing is a convenience fee for your businessâs working capital.
Although thatâs the typical experience, there are other kinds of accounts receivable financing.
Some accounts receivable financers simply advance you 100% of your outstanding invoices. In return, you pay the lender back weekly over a set period of timeâoften around 12 weeksâuntil the advance gets cleared.
In this case, youâre never waiting for the customer to settle your debt, although this sometimes means your lender will collect from your customer instead.
Letâs say you have a $100,000 invoice with 30-day terms.
A financing company might immediately advance you 85% of that amountâ$85,000âand hold $15,000 in reserve.
Your customer then pays that invoice 2 weeks later. After subtracting the 3% processing fee of $3,000, the financing company keeps its factoring feeâ1% per week, which in this example is 2% or $2,000âand gives you the $10,000 left over.
You might be feeling like $5,000 is a steep price to payâbut that all depends on your businessâs financials.
If you needed money to make payroll a week after sending out that invoice, then your accounts receivable financing lenderâs fees donât seem too bad after all.
Your businessâs financial situation might seriously benefit from extra cash flowâso capital right away could definitely be worth those fees.