Invoice Factoring – Best Small Business Loan
When your customer doesn’t pay you on time, invoice factoring is a great resource. With invoice financing, you turn your IOU into an asset, and are able to cash in on it. The business world runs on credit. In the business world, you provide services to a client and then invoice them. You don’t get payment, until your client actually pays you though. In the meantime, you still need capital to continue buying more supplies in order to keep your business running. Where do you get this money in order to grow your company? Invoice factoring!
Invoice factoring, also known as accounts receivable financing, is great for short term borrowing. Businesses get the funds they need using the money owed to them from customers as collateral. This is helpful because it immediately gives you money even though you haven’t been paid by the client yet. Typically, you’ll need to pay a small % of the invoice amount to the company for their service – but it’s worth it because you get the funds right away rather than having to wait the full length. Lenders love invoice factoring because it’s a secure form of lending to them.
How much can you get from invoice factoring: There are three types of invoice financing, and each one is a little different.
Invoice factoring: This is the most best small business loan. Lenders pay you 70-80% of the invoice total. If/When the customer pays the entire invoice, your company will get the remaining 30-20%, minus the fees/interest due to the lender. Some people don’t like this because the lenders collecting the money from the invoiced client – so your client is now aware that you’ve turned to a lender and are having financial difficulties.
Invoice discounting: Many businesses prefer this. In this situation, the lender gives you up to 9% of the total invoice amount, and then your client pays you. In this situation the customer pays you, so they never learn about the fact you’re having financial difficulties and turned to a lender.
Asset based: This is another type of invoice factoring. In this method, you put up an asset like a machine, supplies, or invoices. Unlike other types of invoice financing, asset based loans require large monthly account receivables (millions). You must have a good financial background, financial statements, and assets that can’t move magically. If you’re a startup – ignore this option.
Invoice factoring speed: There’s two steps when it comes to invoice factoring. First, the lender gives you 70-90% of the total invoice amount. This happens in 24-48 hours. The second stage is when the lender deposits the other 20% minus the fees. It only happens after the customer has paid the invoice.
The only real time consuming step is the verification stage. This is where the lender verifies the authenticity of the invoice, before giving you funds. Lenders want to make sure this is a real invoice, and there’s no risk of chargebacks, disputes, payments etc. This can take a minute, depending on how complex your business is.
Requirements: Technically anyone can qualify as long as they have open accounts receivables. The more reliable your company is, the more reliable your clients are, the easier it is to get approved for invoice factoring. The more often you to sell invoices from solid clients, the more likely a lender will continue factoring them.
Typically lenders will look for businesses that are free from legal issues, don’t have tax issues, don’t have liens, and who have reliable customers who pay invoices in 90 days.
Cost: The cost of invoice factoring will depend on the lender and the riskiness of the transaction. It’s not uncommon for lenders to expect anywhere from 1-3% per month. The less risky the transaction, the lower the rate.
What are the Payback terms: In most cases the length of time you wait to get paid will depend on how long your client takes to pay you.
Invoice financing is one of the easiest ways to get a small business loan. In our opinion, it’s the best small business loan you can get, because it helps you get funds without having to take a loan or pay super high interest rates. If you build a good relationship with a lender, it’s possible to get immediate revenue on every single invoice via invoice factoring.