Invoice Financing: Is It Right for Your Small Business?

Invoice Financing: Is It Right for Your Small Business?

Did you know that 82% of small to medium-sized companies fail due to cash flow issues? While this number may be shocking to some, it goes to the importance of healthy cash flow. Many factors impact a company’s cash flow, such as accounts receivables, expenses, and sales. Among those factors, unpaid or late-paid invoices is one of the biggest problems for small business owners. Fortunately, invoice financing for small businesses can help with cash flow.

Invoice Financing for Small Business

Invoice financing, also referred to as accounts receivable financing, is the process of selling your outstanding invoices to a lending company in exchange for cash. While a lot of lending companies offer invoice financing, it’s not exactly a loan. The money you receive from selling your invoices is already due to you; it’s just that you didn’t wait for 30, 60, or 90 days to receive payment.

Qualifying for invoice financing is relatively easy, but before you apply for one, you need to make sure that it’s the best funding solution for your business. To know that, here are five factors you need to consider.

1. How Invoice Financing Can Fix Your Cash Flow Problem

The first thing you need to determine whether invoice financing can solve your cash flow issues. Invoice financing can benefit businesses that can’t afford to wait for the usual 30 to 90 days to get paid. If you need money to pay for operational expenses, like utilities, payroll, and suppliers, and you can’t wait for months to receive payment from your customers, it may be best to apply for invoice financing for small businesses.

2. If Your Company Can Qualify for Invoice Financing for Small Business

If you’ve decided that invoice financing can remedy your cash flow problem, the next step is to determine whether your company qualifies for invoice financing. Your invoices should be free of liens and there are three common scenarios create a lien on your invoices:

  • Tax liens are most likely filed by taxing authorities.
  • Previous business loans can also create liens if the bank filed a lien on your invoices to secure collateral.
  • Your invoices may also have liens if you have a lawsuit.

Other than being free of liens on your accounts receivables, you should also have an organized inventory management system in place, as well as a proven track record of delivering your products or services without a hitch.

3. If Your Income Can Cover the Costs of Invoice Financing

While invoice financing provides fast and easy funding, it doesn’t come cheap. It costs more than bank-rate loans or other forms of small business loans. The cost of invoice financing depends on your sales volume, the value of your invoices, and your customers’ creditworthiness. Generally, you can benefit from invoice financing if your profit margins are at least 15%. This doesn’t apply to everyone, but this will give you an idea of whether you’re cut out for invoice financing or not.

4. If Your Customers are Creditworthy

Unlike other forms of funding, invoice financing relies heavily on your customers’ credit rating rather than yours. After all, they are the ones paying for the invoices. Your customers should have strong credit scores. Most lenders conduct due diligence before purchasing your invoices and they often use a Dun and Bradstreet commercial credit report.

5. If Your Customers are Supportive of Your Decision to Factor Invoices

Before lending companies purchase your invoices, they will also verify them. This helps them determine if your customers have accepted and received the product or service being invoiced. This means that lenders will contact your customers and they will know that you’re selling pending invoices. Keep in mind that every financing company has its own process and it’s usually structured to lessen customer impact.

Is Invoice Financing Right for Your Business?

Invoice financing is a great funding option for companies that can afford it. It’s fast, convenient, and hassle-free, especially if you apply through alternative online lenders. You need to assess your business if financing your invoices is the right move. Do you need additional working capital ASAP? Is your company relying on large payments? Do your customers regularly pay late? If any of these situations are hurting your cash flow, you should consider financing your invoices.

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