What is invoice financing? Although you may never have heard of this type of business financing, it can be a valuable solution for your small business. As the name implies, invoice financing allows you to obtain an advance against the value of your business’s unpaid invoices. Here’s a closer look at how it works and what situations it’s useful for.
What Is Invoice Financing Useful for?
There are lots of situations where invoice financing can help. Invoice financing works best for businesses that don’t get paid right away, but instead invoice their customers and wait to receive payment in 30, 60 or 90 days (or even later).
Sometimes, waiting (and waiting) for those customers to pay you can really put a crimp in your cash flow. Theoretically, your business is doing well because you have lots of outstanding invoices—but in reality, you don’t have the cash on hand to handle immediate expenses such as payroll and inventory. This is where invoice financing comes in handy.
Invoice financing can be useful for very small businesses, such as freelancers, for whom an unpaid can make the difference between paying that month’s mortgage or not. However, it’s also valuable for businesses with big clients that frequently are slow to pay, such as government agencies or corporations that may have a lot of red tape involved in the payment process.
Invoice financing works best as a short-term financing option that can provide the working capital you need to get over the hump until you get paid. Because you get your money quickly, invoice financing is an ideal solution when an unexpected cash crunch hits and you can’t wait for a traditional bank loan. It’s also a great solution when you don’t need a big loan—just a little bit of extra cash.
Choosing the Right Invoice Financing Solution
Of course, some invoice financing solutions are even faster than others. When you use Fundbox to finance your invoices, for instance, you don’t even have to fill out an application—just create a free Fundbox account, which takes less than a minute to set up, and link it to your accounting app. Once you’re signed up, you can clear any unpaid invoice at any time and get the funds transferred to your business bank account right away.
Are you wondering how invoice financing differs from invoice factoring? In factoring, the factoring company pays you a percentage of each invoice’s value. You have to wait until the customer pays the invoice to get the rest of the money—minus a fee. When you use Fundbox, however, you get the entire value of the invoice right away—no waiting until the customer pays.
Invoice financing has another big advantage over invoice factoring: There is no interference in your relationship with your business’s customers. While factoring companies may contact your customers to get your invoices paid, Fundbox stays out of your customer relationships. You’re still in charge of collecting on your invoices, so there’s no confusion on the customer’s part about why a strange company is suddenly calling them.
Repaying your Fundbox advance is easy, too. You repay the money automatically in 12 weekly installments, with a clearing fee that’s automatically set for each advance. You can see pricing before you clear the invoice, so the process is completely transparent, and if you decide you want to pay early, there’s no prepayment penalty.