Your business is experiencing a cash flow crunch, and you’re certain that if your outstanding invoices were paid, you’d have plenty of cash on hand to maintain daily operations and even invest in growing your business.
Unfortunately, your clients aren’t breaking down your doors with checks in hand, and you’ve got to find an alternate solution to address your cash flow issues. Obtaining an invoice advance may be the answer you’re looking for, but it’s important to familiarize yourself with the fine print and alternatives before signing on the dotted line.
What’s an Invoice Advance?
There are two schools of thought on what invoice advances entail. Both are technically “correct,” because they involve getting cash for your B2B invoices right away, though the options work differently.
Invoice financing involves taking a loan out. The lender offers you a line of credit based on your total amount of unpaid invoices. You take out cash and continue to collect payments for your invoices. You’ll then pay the lender back in installments, just as you would with a credit card. Each payment includes interest and some of the principal balance. As you pay down the balance, you can tap into the line of credit and take out more.
Invoice factoring involves selling your invoices to a third party, referred to as a factor or factoring company. The factor pays you for the invoices and then collects from your customers. There’s no loan to repay. In most cases, you decide which invoices you want to factor and how often you factor. Be sure to check your contract and terms to understand the expectations.
Things to Consider When Exploring Invoice Advances
Invoice advances can get you cash in hand quickly, but they’re not right in every situation. Because there are multiple ways to obtain advance payments, you’ll need to understand how each works before you choose which one fits for your business situation.
Financing: When you finance invoices, those invoices serve as collateral on your debt. Even still, the lender will want to verify that you have the ability to repay the debt, so it will look into your business history, credit score and other details. If you aren’t well-established or don’t have good credit chances are you will not qualify for financing, or your rates will be less than optimal.
Factoring: Factoring companies are more concerned with your clients’ ability to pay the debt than they are with your ability to repay, simply because they’re collecting from the clients, not from you. For this reason, they’ll be running diligence checks on them, not on your business. In fact, when you work with a company like Interstate Capital, we’ll work hand-in-hand with you and keep you informed about your clients’ ability to repay. That way, you always know how large of an order you can accept, or how much work you can do for any given client before it looks like they might not be able to pay. This means, you can accept more work without taking on excess risk.
Financing: Because financing invoices is more like revolving credit, it’s easy to get stuck paying on the balance for an extended period of time. Moreover, because interest fees continue to accrue until the balance is paid in full, it can be a very expensive way to borrow.
Factoring: Although some factors have a “buy back” clause which requires you to repurchase any invoices your clients don’t pay for within a specified amount of time. Factoring companies proactively work to avoid this on the front-end by performing credit checks on your clients.
Factoring companies take their fees out of the advance they give to you, so there is no bill or loan to pay back. In this way, you avoid getting caught up in a debt cycle.
Financing: It’s important to explore the true costs of financing. You’ll be paying back the loan amount, interest and often fees. The longer it takes you to pay off your balance, the more expensive it is to borrow.
Factoring: There are fees associated with factoring too, though they’re generally small and are taken off the top before payment is sent to you.
Both financing and factoring allow you to get cash for your unpaid invoices promptly, but they differ in terms of application. There are other financing options that do not involve your invoices. A traditional business bank loan may work if you have good credit and an established track record in business. Choices like a merchant cash advance, which is essentially borrowing against your future revenue, may be an option as well, though it can be expensive.
Get an Online Factoring Assessment
If invoice factoring sounds like the right choice to meet your business cash flow needs, Interstate Capital can help. Tap into a free factoring assessment to get started.