Invoice Finance: What Small Businesses Need To Know

If you’re like most small business owners, then you know that unpaid invoices are notorious for causing cash flow issues. While offering a “purchase now and pay later” option boosts your business in terms of convenience, some customers may fail to make their payments on time.

Waiting around for late payments isn’t ideal when you have a team of employees to compensate, essential business expenses to cover, and expansion or investment plans to execute.

Even with a sufficient receivables account, you still need cash to grow your business. Thanks to invoice financing, you can use all of your unpaid invoices to overcome your cash flow problems and continue growing your business.

What Is Invoice Financing?

Invoice financing, also known as “accounts receivable funding,” is a form of short-term borrowing. Business owners can take out a loan using invoices from their accounts receivable as collateral.

While invoice financing is much easier to qualify for than a small business loan, borrowing costs are usually higher. You’ll also be responsible for collecting the payments that are still owed on the unpaid invoices, and late payments may affect the fees associated with your invoicing loan.

Luckily, accounts receivable software, like Upflow, use A/R automation to manage your workflows and receivables, so you can quickly improve your DSO, get paid faster, and reduce the number of late payments.

When you apply for invoice financing, lenders advance a high percentage of your unpaid invoice amount, usually within a couple of business days. When customers pay their invoices, you receive the remaining portion minus company fees.

What Are the Benefits?

Invoice financing can offer the following benefits if you have outstanding invoices in your accounts receivable and need money immediately to cover your expenses.

You Won’t Have To Apply for a Small Business Loan

Invoice financing turns unpaid invoices into assets. Instead of going through the tedious and paperwork-heavy process of applying for a small business loan, all you’ll need to do is provide your accounts receivable information.

You Won’t Rack Up Long-Term Debt

Invoice financing is intended for small loans that are distributed typically within 48 hours, and you’ll need to pay back your debt within a relatively short time frame.

Your Clients Won’t Be Notified

You aren’t selling your clients’ information to a third party, so you aren’t obligated to let them know that you are borrowing money based on unpaid invoices.

Are There Any Cons?

As with any loan or line of credit, there are a few things you should be aware of when applying for invoice financing, including the following.

It Can Be Pricey

Invoice financing fees are competitive, but when you incorporate these fees into your APR, rates could be significantly higher than standard Small Business Administration (SBA) loans, which typically cap at 8%.

Your Customers Determine Your Fees

The amount you’ll pay in fees largely depends on how long your customers take to pay their invoices. Invoice financing companies may charge you late fees if customers make late payments or miss their payment deadlines altogether.

It’s Only Suited for B2B Businesses

Businesses that require instant payments for services or products aren’t as likely to qualify for invoice financing.

How Can I Apply for Invoice Financing?

Invoice financing is offered by online lenders and financial tech companies rather than banks. Some of the most popular invoice financing companies include: