Invoice finance happens when you sell your invoices that are due in the future to a factor, or an agent so you’re able to get quicker cash flow to your business.
If you are in B2B business, you may have heard of factor invoices before. However, if you haven’t, we’re here to explain what are they and how they work.
The basic requirement is you need to have creditworthy customers for the factor to loan you money before your invoices are paid. Factor invoices help business owners to obtain money due to cash shortfalls or any unforeseen circumstances in the business where it requires urgent use of money.
It takes 3 – 5 working days for invoices to get approved by factors, depending on whether the factor that you applied from uses electronic application system or traditional paperwork application. Most factors will loan up to $150,000 worth of invoices that are due in 90 days or less.
Invoice finance are short-term financing designed to help business owners manage their immediate cash flow needs. This financing needs to be paid when the payments are received from the customers whose invoices you factored.
This financing option allows you factor any specific invoices as and when you need it. For instance, should you need immediate cash for your business month’s expenses, you can factor invoices that are due within the next 3 – 5 weeks or so. Factors will provide with the cash amounting to these invoices so you’re able to use them for any of your business needs.
You should know that while Invoice finance is more expensive than bank loans or LOC (line of credit), it’s still cheaper and more affordable than any short-term loan such as the bridge loan. There are business owners who prefer Merchant’s Cash Advance, but this comes with a considerable fee. Not only that, factor invoices can be taken out based on how many invoices amount you need rather than you’re given a lump sum from banks/lenders.
Despite being flexible and having more lenient approval requirements, invoice finance has several setbacks. We mentioned that it’s more expensive than a bank’s loan, but other than that, some factors may require you to make a minimum payment from the amount of invoices you factored, which can cause further challenges in managing your expenses even though the factor loaned you the money you needed.
Since the approval happens quickly, there might be hidden fees that you’re not made aware of and this will increase the amount of your repayment quite significantly. There have also been cases where the factors would call your customers to remind them to make payment. This may not bode well for the relationship you have with your customers.
Whatever the circumstance are, invoice finance helps one to come out from lot of trouble, but you need to make sure you’re choosing the right factor. You don’t want to end up paying more than what you owe.