Is Invoice Factoring Right for Your Small Business in 2022?

What Is Invoice Financing?

Invoice finance, also known as accounts receivable financing, is a type of asset-based financing in which small  business owners receive a cash advance in return for the lender’s ability to collect on outstanding invoices.

In most cases, invoice financing providers will provide you with an advance of up to 85% of the open invoice and you will receive the remaining 15% (fewer fees) when your invoices are paid.

Invoice financing is typically easier to qualify for than other forms of small company loans since the invoices themselves act as security for the funds you borrow. In essence, the larger the company that owes your business money, the easier it is for you to borrow against it.

As a result, invoice financing is an excellent funding option for business-to-business (B2B) and service-based firms, as it alleviates cash flow issues caused by unpaid client bills.

Invoice Financing Details

Pros

• Rapid availability of working capital
• Reduces cash flow issues caused by unpaid bills
• Less difficult to qualify for than any other forms of company finance
• Invoices are used as collateral
• If your customers pay on time, you'll save money

Cons

• Fees may be greater than for other kinds of financing
• It is difficult to estimate costs beforehand because fees are dependant on the length of time it takes the consumer to pay
• If clients pay late or do not pay at all, it may be costly and unsafe
• Specific to B2B and other invoice-based enterprises; not an option for most B2C firms

“With invoice finance, you pay for quick and immediate access to your money.”

The Best Invoice Financing Options

AltLine Factoring

AltLINE is an invoice factoring firm that is part of Southern Bank's commercial lending division.

 AltLINE provides invoice factoring of up to $4 million per month (with a minimum of $15,000 per month required) and up to 90% of the invoice amount. 

Businesses may apply for invoice factoring with AltLINE quickly and conveniently online, and AltLINE will assess your eligibility based on your accounts receivables and the credit quality of your clients. 

AltLINE is an excellent choice for businesses whose cash flow is frequently hindered by unpaid bills, especially since, as an invoice factoring firm, they will manage the process of collecting payments from your clients.

How Does Invoice Financing Work?

Invoice finance is a type of asset-based financing in which you obtain a capital advance in exchange for outstanding bills. 

This differs from many company finance options, structured as term loans, which means you receive a flat sum of cash that you repay over time with interest.

When your customer settles the invoice, you will receive the remaining 15%, less the lender's costs. You'll often be charged a processing fee of around 3%, as well as a factor cost. 

The factor cost, which is normally between 1% and 2% of the entire invoice amount, is levied for each week the client takes to pay.

With invoice finance, you pay for quick and immediate access to your money, releasing cash flow previously held up by unpaid bills.

Types of Invoice Financing

Factoring of Invoices

Although invoice factoring and invoice financing are sometimes used interchangeably, there are variations between the two forms of borrowing.

Traditional invoice finance requires you to repay the cash advance with costs. You sell your invoices at a discount to the invoice factoring provider with invoice factoring.

This also entails the invoice factoring firm collecting money from your clients in most circumstances.

Line of Credit for Accounts Receivable

An accounts receivable line of credit is a sort of invoice financing in which unpaid invoices are used to finance a credit line. 

Your invoices secure the line of credit in this situation, and the amount you get on the line is typically up to 85 percent of the value of those invoices.

You pay an interest rate depending on your balance with an accounts receivable line of credit, and when a client pays their invoice, the money is taken from your current balance. 

Furthermore, some lenders may charge you a draw fee each time you use the credit line.

Best Invoice Financing Companies

Porter Capital 

• Porter Capital offers a maximum of $15 million in funding
• Factor rates start at 0.75 percent each month and may be completed in as little as 24 hours
• There are no specifics provided for qualification
• Fast funding and adaptable alternatives, including those that can accommodate firms who have previously struggled with finance

Triumph Commercial Finance

• Triumph Commercial Finance a maximum of $5 million in funding
• Factor rates are dependant on the number of your invoices and the length/type of your contract
• If invoices are filed by the cut-off time, they can be processed the same day
• There are no current UCC filings; non-transportation industries can earn $50,000 per month
• Financing for higher invoices; the possibility to upgrade to more items

Payplant

• Payplant offers amounts up to $1 million in funding
• Factor rates begin at 1.2 percent
• Specifics for qualifying are not accessible in as little as 24 hours
• Larger companies that can take advantage of the most reasonable prices

“At the most basic level, any small firm with a business-to-business model that currently has outstanding receivables is eligible for invoice financing.”

How to Qualify for Invoice Financing

Invoice finance is far more accessible than other sorts of company loans. At the most basic level, any small firm with a business-to-business model that currently has outstanding receivables is eligible for invoice financing.

Some of the conditions for invoice financing will differ depending on the specific lender or firm. When deciding whether or not you qualify for financing, invoice finance businesses will often look at the quality of your invoices as well as your clients' payback history.

Although typical company loan criteria may be less significant with invoice financing, lenders will almost certainly consider aspects such as your credit score, time in business, and yearly revenue. 

In this scenario, as with all forms of financing, the greater your company's credentials, the more probable it is to obtain invoice financing with the best rates and conditions.

How to Apply for Invoice Financing

If you believe invoice finance will fulfill your demands, you should look for a suitable lender and begin the application procedure.

Fortunately, invoice financing applications are typically quick and straightforward, especially compared to more traditionally structured loans, like SBA loans. 

As previously stated, your invoice or invoices will be the most significant component of the application process because they will primarily decide the amount and terms of the loan you qualify for.

Of course, depending on the lender, they may need you to provide extra information about your company and finances, such as:

• A valid driver's license
• Bank statements for businesses
• Financial statements for businesses
• Credit scores for individuals and businesses

The Bottom Line

In the end, invoice financing is an excellent solution for B2B or service-based organizations seeking to free up cash flow related to outstanding bills. 

In comparison to other types of finance, invoice financing is often simple to qualify for and quick to fund, with many alternative lenders offering online-based, expedited application processes.

However, remember that invoice financing can be costly, especially if your clients are late with their payments. 

As a result, before you choose this sort of financing, you should think about and analyze all of your alternatives to ensure that you choose the best, most inexpensive solution for your company.