How Does Your Business Qualify for Invoice Financing?

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How your business can qualify for invoice financing: Key steps and criteria to improve cash flow

Do you have irregular cash flow in your business? Feel stuck in your business in the mid of employee and supplier problems? Want to know how to reverse this problem? In a previous article, we shared about Invoice Factoring and its benefits to removing your irregular cash flow.

It is similar to invoice Factoring, but it has some different features. Invoice factoring and invoice Financing are the best options to regulate your cash flow in the business in the short term compared to loans and borrowings.

Do you want to know more about invoice financing and how businesses qualify for this method? Stay tuned to this article till the end.

What is Invoice Financing?

Invoice financing is a method that helps business owners to advance their unpaid invoices for immediate fund seeking from the financing company. Unpaid invoices are the collateral for the company to get short-term borrowings from the financing company.

Invoice financing helps the business to run unstoppable. It helps to increase the cash flow, manage the operations and pay cheque for employees, hire more employees and expand the growth of the business in the short term. The owners do not have to wait 30-120 days for the customer invoices.

Invoice financing applicable only for B2B businesses, not B2C; B2B has large customer payment history. Construction, agriculture, and manufacturing are B2B industries. Businesses that belong to these industries are using invoice financing to turn invoices into cash. It is not suitable for companies whose end transaction is with customers.

The Work Pattern of Invoice Financing

Step 1: Invoice financing deals with three parties the business owner, the financing company, and the customer.

Step 2: The company issues invoices to the customers at the regular duration of 30 to 90 days

Step 3: The financing company scrutinizes the invoices and advances 80% of the amount to the business owners.

Step 4: In Invoice Financing, unpaid invoices responsibility is in the hands of business owners. So, the customers sent the invoice payment to Natasha at the end of the month.

Step 5: Once Natasha receives the full payment from the customers, she has to pay the financing company along with fees

Example:

Natasha is a wholesaler saree businesswoman. She sent invoices to all her customers. Now she needs immediate cash, and she should wait for at least 30 days to gain money from the customers.

She approaches a financing company in exchange for her unpaid invoice worth 30,00,000. The Financing company receives the invoices and advances the amount of 25,00,000.

Natasha receives the full invoice amount at the end of the month. Now Natasha has to pay a 2% service fee worth 60,000. Now, she pays the fees to the financing company and receives the remaining amount (5,00,000- 60,000=4,40,000)

Difference Between Invoice Factoring & Invoice Financing

Invoice Factoring

Invoice Financing

1. The factoring company buys the unpaid invoices of company

1. The financing company gets unpaid invoices from the company as collateral


2. The factoring company is responsible for collecting the invoice amount from the customers


2. The business owner is responsible for collecting payment from the customers


3. The customer knows that the invoices sell to the factoring company and knows the company condition is not good


3. Here, customers are not aware of selling invoices to the financing company


4. Invoice factoring is suitable for all businesses


4. Invoice Financing is suitable only for B2B businesses


5. Invoice Factoring also known as Debt Factoring, Accounts Receivable Factoring


5. Invoice Financing is also known as Accounts Receivable Financing


Benefits of Invoice Financing

✅ Access to immediate cash

✅ Expand and grow the concern fast

✅ Ready to work on big projects

✅ Not necessary to inform the purpose of spending money

✅ The business owners will get cash within 24 hours when the documents are perfect

✅ Reduce bad debts and avoid late payments

✅ Credit control and collection of the invoice amount is in the hands of business owners

✅ Helps to improve the cash flow on time and focus on other activities in the business

✅ A better strategy to approach cash in the short term compared to loans and borrowings

✅ Businesses can maintain the confidentiality of their irregular cash flow, and they will approach financing company

✅ Improves the credit score of the businesses

✅ Cordial relationships can maintain with the employees, and customers

Pros & Cons of Invoice Financing

Pros:

  • The financing company considers the credit score of consumers; not business owners
  • Invoice financing is not a debt, so it is not necessary to enter into books
  • Great support system and regulates the cash flow
  • Maintain confidentiality and works on flexibility
  • Funding helps to expand your business in a short time

Cons:

  • Invoice Financing is expensive compared to loans and borrowings.
  • Invoice Financing regulates the cash flow problems; it will not solve the other issues going on in your concern.
  • Some companies contact the customers personally and inform the irregular cash flow in the business. It creates a negative setback in the minds of customers. So, pass the information to the customers once the invoices financed.
  • Invoice Financing is applicable only for B2B businesses.

How Does a Business Qualify for Invoice Financing

Customers should have high creditworthy. They should have a good history of making prompt Invoice payments on time. At the same time, the Financing company expects high credit scores from the business owners. A low credit score of the owners leads to high fees by the financing company.

The following eligibility criteria check by the financing company before providing cash:

  • The financing company scrutinizes the financial statement and income statements of the company. Check the turnover of the business, employees and suppliers details, etc….
  • The financing company revises the cash quotation and checks whether the owners have the potential to repay the cash on time.
  • The financing company checks the customer's credit rate and the quality of customers.
  • The financing company checks the unpaid invoices and their originality.
  • Understand the vision of the company.

Once you meet the above criteria, your business is qualified to invoice Financing, and are ready to approach the financing company.

How to Apply Your Business for Invoice Financing

Before applying for Invoice Financing, submit the documents attached to the application:

  • Fill out an online application and mention the cash
  • Share the details of unpaid Invoices
  • Purpose and vision of your business
  • Bank statements and account details related to the business
  • Financial statements of the business
  • Your personal and customer credit scores

FAQ:

  1. Do Invoice Financing available in Banks?

No, Invoice Financing is not available in banks. It is offered only by finance companies and lenders online.

Closing Thoughts

In this article, know the difference between Invoice financing and Invoice Factoring. Which one is best for your business?

Before that, a dedicated and perfect invoice is essential to approach the financing and factoring companies. InvoiceTemple is one of the best online invoices software to create invoices within a few minutes. And one more advantage, you can manage all your finance in one place.

Invoice Temple is a trusted software used by 40,000 + small business owners. Try it for free for the first five invoices. What are the views of this article? Let me know in the comments section.

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