Invoice financing, also known as accounts receivable financing, is when you pre-sell the unpaid invoices of your business to another company for a lump sum payout. A fraction of the value will be retained by the accounts receivable financing service while waiting for your customer to make the payment. When the customer has paid, you will receive the remaining funds owed minus the weekly fees that have accumulated while waiting for the customer to pay. This can become very expensive, so it is a good idea to use invoice financing or factoring, only when you are sure that the customer will eventually pay.
Best Invoice Financing Options for Small Businesses
Here is a look at some of the best invoice financing options for small business:
Merchant Cash Advance
When you own a small business and are strapped for cash to operate your business, invoice financing is one of the options you have to get a cash advance. A great invoice financing option that is available for small businesses is merchant cash advance.
You can receive from $2,500 to $250,000 in as little as 7 days. The term for this type of invoice financing is daily deduction from the merchant account and costs 1.14 to 1.18 of the factor rate.
Short-Term Business Loan
A short-term business loan is another excellent option for invoice financing for small businesses that require quick access to cash. Like with merchant cash advances, you can receive between $2,500 and $250,000 with this invoice financing option.
Short-term business loans as an invoice financing option will cost 14% APR (annual percentage rate) and up. An advantage of this type of financing is that you can receive the cash you need in as little as 48 hours.
With traditional invoice financing, you can receive 50% to 90% of the total invoice outstanding. The term of this invoice financing option is that you receive the remaining 10% to 50% – excluding the factor fee – when the customer pays the invoice.
Invoice financing costs about 3% plus the percentage per week outstanding. When you need quick cash flow for
your small business, traditional invoice financing is ideal as you can receive the cash in as little as
When you cannot apply for a loan from traditional lenders like banks, there are alternative lenders that you can turn to, including invoice financing companies. Invoice financing options for small business come with quite a few advantages, including:
- They are easier to apply for than traditional bank loans
- They do not require collateral
- You get better working capital
- You spend less time chasing payments from customers
Invoice financing can be a rather useful tool to expedite sudden cash flow needs for a small business. However, you should be diligent in your research when picking a lender and make sure to read your contract carefully before signing. With so many invoice financing options for small business out there, you should shop around for different lenders, run the numbers and read the fine print to make sure that you work with a reputable factoring company.