1. Businesses With 5+ Years of Consistent Revenue
When it comes to getting the best financing, you’re sitting in the catbird seat if you’re a business with five or more years of consistent revenue. After all, you have nearly everything that a lender is looking for, including:
- Long operating history
- Consistent revenue and profits
- Proven ability to repay loans
With these types of financials, you can likely have access to any type of financing you would like.
Invoice factoring is certainly an option when it comes to generating financing for an established company. However, as an established business with good credit, invoice financing may be a more cost-effective option for you. The difference between invoice factoring and invoice financing is subtle, but it can save you money if you can qualify.
The important distinction between the two is this: with invoice factoring, you are selling your accounts receivable to a third-party; with invoice financing, you’re taking out a short-term loan using your accounts receivable as collateral.
How Does It Work?
What Are the Rates?
Am I Eligible?
How Much Can I Get?
What Documents Do I Need?
What Are the Terms?
Invoice financing involves taking out a short-term loan that you pay back after your accounts receivable come due. A simple example may make this clearer.
Let’s say you are owed $10,000 in payments over the coming month. You know that you’ll have $10,000 in 30 or 60 days, for example, but you need that cash flow now to finance your existing expenses. With invoice financing, you use that $10,000 as collateral, receiving about 80 percent in advance, or $8,000. When you finally receive full payment from the customer, you pay back the $8,000 you borrowed, plus an additional fee for the lender.
This type of financing is good for established businesses because it only works with proven accounts receivable and a reliable history of payback — two characteristics of large, established companies. In addition to making it easier to qualify for virtually any type of financing, these solid financial characteristics also lead to lower rates.
If you’re looking to take the path of invoice financing, your credit, while important, is not as critical as the quality of your receivables. Think about what you’re asking a lender to do. Essentially, you’re asking for a cash advance, and you’re not offering any of your current assets as collateral for that money. As you can imagine, lenders will want to make sure that your receivables are as good as gold before they hand over any money. For that reason, you should expect to provide plenty of documentation of your accounts receivable when you apply.
Invoice financing is a short-term process, one that rarely extends more than 30 or 60 days. This can make the fees that invoice financing companies take out seem very high on an annual basis. For example, you might see a monthly interest rate anywhere between 1 percent and 3 percent with invoice financing. On a monthly $10,000 transaction, that might only amount to $100 to $300; however, on an annual basis, that interest rate will be in the high double-digits.
As a well-established business, however, you’re likely to get rates that are towards the lower end of that spectrum. Lenders will reduce rates in exchange for a higher probability of getting paid back, so companies like yours are the exact type of businesses that are in demand.
As a long-standing business, it’s highly likely that you’ll qualify for nearly any type of financing that you can imagine. But again, when it comes to invoice financing, the most important thing for lenders is that your receivables are iron-clad. The longer you can show that your invoices get paid on a regular basis, the more likely you are to qualify for invoice financing.
Invoice financing typically covers somewhere between 70 percent and 90 percent of outstanding accounts receivable. Again, the longer you are in business and the more consistent your revenue history, the more likely you are to get approved at the higher end of this range. Generally, you can expect somewhere around 80 percent of your receivables value to be available for invoice financing.
If you’re not a fan of long loan applications, invoice financing might be a plus for you. In most cases, you won’t have to provide nearly as much documentation for invoice factoring as you would for a traditional loan. This is because the cash advance-like payment you’ll receive via invoice financing is collateralized by your accounts receivable, rather than other general company assets. Thus, to apply for invoice financing, you’ll likely need to provide these types of documents:
- Cash flow statement
- Evidence of outstanding receipts
- Repayment history
- Anticipated and/or recurring sales
If your business also has a documented history of paying back loans on time, you may also want to provide that information to your finance company.
Invoice financing is a short-term solution. If you’re looking for a long-term loan, that’s a whole different product. Most invoice financing arrangements run 30 days or less, although in some cases they may extend to 60 or even 90 days. The bottom line is that you want to get into and out of an invoice financing transaction as quickly as possible, because you’re likely being charged a high interest rate and fees may compound on a daily basis.