Invoice Financing Explained
There are a couple of different ways that a business can access funds using their accounts receivable. In general, this is known as accounts receivable or A/R financing or invoice financing. When a business sells its outstanding customer invoices to a financing company, it’s referred to as “factoring” and the finance company is called a “factor”. In this scenario, the finance company or factor gives the business immediate cash for up to a percentage – typically 85% – of the invoice value. Traditional banks do not typically purchase invoices like a factoring company does; instead they use the invoices as collateral against which they lend.
Invoice financing is a good option for businesses that need an infusion of cash while waiting for their customers to pay their invoices.
The benefits of Invoice Financing
- Immediate access to cash with a much faster process than a business loan
- Typically lower fees than a business loan
- No new debt is incurred and therefore there are no monthly loan payments
- Improves the business’s liquidity and eliminates the need to chase late payments
- Approval is based on the creditworthiness of your customers, not based on your business’s collateral, creditworthiness, or revenue
How Invoice Financing Works
There are several parties involved in the transaction including you, your customer, your supplier, and the financing Invoice financing is designed for companies that work in the business-to-business (B2B) space and offer net terms to their clients. Most companies pay their invoices in 30, 60, 90 days or even later. Invoice financing gives businesses instant access to cash that’s sitting in the outstanding invoices waiting to be paid.
As stated above, approval and lending decisions are based solely on the quality of the invoice and the customer’s reliability and payment history. This makes the review process hassle-free and fast, and in some instances, you can have funds issued the same day you apply.
Here’s an overview of how invoice financing works:
- Once you provide the goods and services to your buyer, you submit the invoice for funding to the finance company
- The finance company verifies the invoice and advances you a percentage of the value of the invoice – typically up to 85% – depending on the amount of the invoice, your customer’s industry, and your customer’s credit history
- The financing company will hold a portion of funds in reserve until the receivables are collected from the buyer
- Once your buyer pays the invoice to the finance company, the finance company sends the remaining payment owed, less the commission or fees charged by the financing company.
And for those of you who are more visual, check out our infographic below::
How VendorPayment Can Help You With Invoice Financing
VendorPayment.com specializes in accounts receivables financing and works directly with businesses who contract with federal, state, and municipal government agencies in the U.S. VendorPayment purchases invoices as low as $100K with no current maximum for high-quality invoices.
Who Qualifies for VendorPayment’s Invoice Financing?
- You operate a business
- Your company sells to other businesses (B2B) or government entities
- Your customers are credit worthy
- Your invoice value is at least $100,000
Why Finance Your Accounts Receivable With VendorPayment?
- Fees as low as 3% for domestic suppliers and 5% for overseas suppliers
- No cap on financed amount
- Choose which invoices to finance
- PO and Invoice Financing all under one roof
- Ability to issue letters of credit
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