All business owners are faced with cash flow issues or funding shortfalls at some point. Invoice loans are a simple and effective way to get a quick cash injection when needed because they shorten the time from completing work to getting payment. However, they’re often misunderstood and there are multiple options within the bracket. On this page, we’ll go over the basics of how they work, so it’s easier to tell if they’re the right solution for you.
Pro Tip: Invoice loans are sometimes referred to as “invoice financing,” “invoice factoring,” “invoice advances,” “accounts receivable financing” or “receivables financing.” The core concept is the same with all these terms and they’re often used interchangeably. However, financing and factoring work differently. We’ll break down the differences in the two near the end.
When are Invoice Loans Helpful?
Larger and well-established companies routinely dip into lines of credit and readily qualify for business loans, but smaller organizations and startups cannot always get the funding they need with traditional methods. Sometimes, even those who might otherwise qualify don’t want to get caught in a debt trap or don’t want something quite as aggressive as a loan. In any of these cases, invoice loans can provide a straightforward solution.
What Can Invoice Loans Be Used For?
Virtually any time a company is coping with a funding shortfall or sluggish cash flow, invoice loans can help. There aren’t generally restrictions on how the cash can be used. A few common reasons businesses use invoice loans include:
- Working Capital
- Vendor Payments
- Equipment Purchases
- Supply and Inventory Purchases
- Costs Associated with Accepting More Work/ Growth
Who Can Qualify for Invoice Loans?
Invoice loans are a type of asset-based financing. That means the amount a business will qualify for and its ability to qualify is based upon the value of the asset. In this case, it’s B2B invoices, though other forms of asset-based loans may leverage things like real estate and equipment. Because the value of the asset matters more than things like time in business and credit scores, more businesses will qualify compared to a traditional bank loan.
How Do Invoice Loans Work?
There are two types of invoice loans which often get lumped together because they both provide business owners with cash for their unpaid invoices. They’re known as “invoice financing” and “invoice factoring.”
When you work with a company which provides invoice financing, the company offers you a loan based upon the value of your unpaid invoices. They’ll perform some basic due diligence to verify your finances to evaluate your average monthly invoice amount and total.
This is what your loan will be based on — the amount of your asset. In this case, your invoice.
You’ll pay back the financing company in installments which include fees and interest. Invoice financing may be set up much like a traditional loan in which you’re expected to pay the loan back within a certain number of months. However, it may also work like a line of credit or credit card. In these cases, you’ll be allowed to draw from the account as you pay down the balance.
When you work with a company providing invoice factoring, the company purchases your unpaid B2B invoices. Instead of performing diligence solely on you, the factoring company will place more focus on the companies that owe you money. When you work with a company like Interstate Capital, you’ll receive information about the creditworthiness of your clients, so it’s easier to decide if you can safely accept more work or orders from them or if they appear risky. From there, you can pick and choose which invoices you’d like to factor and how often you want to factor. Each time you submit an invoice to the factoring company, they’ll advance you a large portion of the invoice’s value, and then they’ll collect payment from your clients. When your client pays an invoice in full, the factoring company sends you the remainder of the value of the invoice, minus a nominal factoring fee.
How Quickly Can I Get Cash with an Invoice Loan?
It’s possible to have cash in hand within 24 hours of submitting invoices for payment, but the options and terms will vary depending on the company you choose to work with.
How Do I Apply for an Invoice Loan?
Getting started with invoice factoring is easy. You can get all the details you need, including additional benefits, costs, and amount of funding you qualify for, all by starting with an instant funding estimate.