How to Use Invoice Financing for Small Business

invoice financing for small business

If you want to give your small business a chance to flourish, you must infuse it with working capital. One of the best ways to do that is by leveraging money from future payments for goods or services. This method is called invoice financing or accounts receivable financing. Invoice financing for small business allows you to sell your invoices to a factoring company in exchange for immediate cash.


Why Is Invoice Financing Best Option for Small Business?

Invoice financing is a great option for a small business when it has outstanding accounts receivables. When you sell your products or services to your customers, you rarely receive payment from them right away. There is a waiting period of 30, 60, 90, or more days after the invoice is issued. The balance sheet shows this due amount as assets.

However, outstanding receivables do not improve your current cash flow situation. Invoice financing solves your short-term capital needs easily as it enables you to get early payment on your outstanding invoices.

Not only you obtain money quickly, but you also skip the lengthy approval process of the bank loan funding. This ensures that your business stays alive and does not shut down due to lack of cash.


Who is Eligible?

Small businesses that sell to other businesses, especially commercial companies or government entities, are eligible for invoice financing. Such businesses have longer payment terms but do not have a line of credit to fall back on to improve their working capital.

Some factoring companies require small businesses to have a minimum monthly sales volume to be eligible to receive invoice financing. Moreover, they may not check your credit score, but they prefer that your customers who will ultimately pay the bills have a solid credit score and good reputation.


How to Apply?

Small businesses may find it easy to apply for invoice financing. The application process time is less compared to applying for business bank loans, as you are applying to receive funds based on capital already owed to your business.

You are expected to fill out an application form, in which you will have to provide your business-related information, business identifying documents, banking information, and details about your most recent and current invoices.

You do not have to provide your FICO score. Some factoring companies may ask for your tax returns, while others may not.


How to Payback?

If your application is approved, you will receive an initial advance payment. It is usually 80 percent of the value of the submitted invoices.

In some cases, your customers are expected to pay the factoring company according to the terms of the invoice. Once it receives all the payment from your customers, you will get the remaining balance of the invoice minus the factor fee.

In case the customers continue to pay the invoices to your company, you can pay off the borrowed amount after you have received the due amount. So it is important to pay attention to the terms and conditions for payback to avoid penalties.


Mistakes to Avoid

Invoice financing is no doubt a valuable financing option for small businesses, but there are certain mistakes you must avoid when selling your outstanding invoices to a factoring company.

Here are the five common mistakes to avoid.

  • Choosing a factoring company that fails to meet your needs
  • Not reading the fine print of your factoring contract and paying extra fees beyond the factor
  • Not informing your customers about your agreement with the factoring company
  • Submitting your purchase order as an invoice to the factoring company
  • Not setting up an accounting process to accurately track the invoice financing details


Wrapping Up

Invoice financing for small business is a great way to quickly get working capital and solve cash flow problems. It is especially suitable for new businesses whose payments are delayed and don’t have the required collateral to get a traditional bank loan. If your business is facing cash crunch due to pending payments and you’re in dire need of capital, then it’s the right to apply for invoice financing for small business.

About Sreeram Sreenivasan

Sreeram Sreenivasan is the Founder of Ubiq, a business dashboard & reporting platform for small & medium businesses. Ubiq makes it easy to build business dashboards & reports for your business. Try it for free today!