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Blog Funding
Nov 29, 2023
5 min read
Last update: May 17, 2024

Small Business Solutions: The Benefits of Invoice Financing

When facing a financial shortfall, small businesses can rely on various financing options to steer them through the challenging time. One of these funding options is invoice financing. Invoice financing is one of the most convenient ways to obtain the funding you need to stay operational in slow months. 

Nonetheless, invoice financing differs strongly from other funding options, such as small business loans including business lines of credit, equipment financing, and SBA loans. If you’re interested in learning more about invoice financing, we’ve created just the guide for you.  

In this article, we’ll teach you all about the ins and outs of invoice financing for small business owners. 

What is Invoice Financing?

Invoice financing is a type of financing that refers to the contractual agreement between a financing company and a borrower. In this agreement, the borrower agrees to relinquish a percentage of their accounts receivable, or incoming invoices, in exchange for a lump sum.

Note: Lenders may refer to this type of non-recourse funding as invoice discounting.

With invoice financing, you can receive immediate cash in exchange for giving invoice financing companies a percentage of your accounts receivable at a later date. Invoice financing is often much easier than taking out a bank loan or line of credit.

Since your invoices may be used as collateral, a lender is much more comfortable giving this funding option to businesses with poor credit scores or creditworthiness. Below, we’ll cover more details about how invoice financing works.

How Does Invoice Financing Work?

Let’s use an example to show how invoice financing works. Let’s say you entered into an agreement with a lender to receive upfront funding in exchange for your currently unpaid invoices (which your customers owe your business). 

Once you provide a service and send an invoice to a customer, you’ll need to copy the invoice amount and work out the terms with your lender. The financing company will send you the necessary cash according to your terms. 

When the customer finally pays the invoice value, you’ll agree to repay the short-term loan amount with any accumulated factoring fees. As you can see, invoice financing is a simple way to secure short-term cash.

If you have a dedicated customer base that always pays on time, it may be an ideal solution to secure quick financing. 

How is Invoice Financing Structured?

While every lender is different, the structure for invoice financing is usually similar to a small business loan like equipment financing. When setting up an agreement, you agree to use one of your invoices as collateral for financing. 

It’s usually uncommon for a lender to lay claim to several of your company’s invoices. Instead, you’ll work out the terms to pay back with interest before you receive your cash advance. 

For example, if you know that a customer pays you regularly on the 15th of every month, your lender will set your repayment date around that time. 

What Are the Different Types of Invoice Financing?

You can likely be approved for receivables financing with reasonable credit and well-known customers. If you’re considering taking this route, here are the three types of invoice financing to be aware of:

  1. Invoice Financing: This is the process of using a percentage of your invoice as collateral to receive a short-term loan. 
  2. Invoice Factoring: This procedure is similar to invoice financing. However, the invoice factoring company buys your invoice and takes full responsibility for collecting the payment from your customer. 
  3. Receivables-Based Line of Credit: You can receive this line of credit using your accounts receivable as collateral. The amount of credit you can receive depends on the total amount you have in accounts receivable. 

Benefits of Invoice Financing for Small Businesses

Let’s go over the benefits (and cons) of invoice financing you can expect once you’ve been approved:

  • Quick and Easy Access to Working Capital: Applying for invoice financing is one of the easiest ways to obtain almost instant access to capital. In some cases, you can receive a cash advance within 24 hours. Invoice financing can give you access to short-term cash flow if you have high-profile clients. 
  • Flexibility and Scalability: Invoice financing is a flexible funding option for both fledging small businesses with bad credit and rapidly growing enterprises. 
  • Improved Cash Flow: Invoice financing is an ideal solution for cash flow issues. With simple underwriting requirements, you can quickly put more money into your business bank account. 
  • No Equity Dilution: If you want to raise capital without giving away ownership of your company, invoice financing is a great option. 
  • Increased Financial Stability: Applying for invoice financing gives you the stability to pay your employees, expand your inventory, and manage your operating expenses. 
  • More Opportunities for Business Growth: With invoice financing, you can focus on what you do best: running your business.
  • Great for Emergencies: If your business is dealing with a crisis, you can apply for invoice financing. Because of its convenient application process and simple repayment terms, you can receive the capital you need to escape a jam. 
  • Simple Approval Process: Your invoices will count as collateral towards your financing. This collateral allows for a simple approval process even if you don’t meet the eligibility criteria for other traditional loans. 

Invoice financing can bring significant advantages to a small business, but there are also some caveats to watch out for: 

  • High Costs: Invoice financing can be an expensive way to raise working capital. You’ll be required to pay weekly interest rates, factor rates, and processing fees. Because of the high invoice financing cost, many businesses apply for a traditional bank loan. 
  • Unpredictable Final Costs: Another downside to invoice financing is that you often can’t be sure of the final cost. If a customer delays their payment, you could pay late fees on top of growing interest for outstanding invoices. These penalties can completely drain your profits from a sale. 
  • Limited Applicability: Not all businesses have the financial wherewithal to apply for invoice financing. Usually, companies in the B2B sector have recurring revenue to satisfy the requirements. If you run an online store, this type of business financing may not be ideal. 

The Invoice Financing Application Process

Applying for invoice financing is a painless process. You’ll generally need to provide your financial documents and complete a loan application. Your financial documents will need to show your accounts receivable over a period of time (usually six months), as well as your annual revenue and payment history.  

These financial documents include bank statements, income statements, balance sheets, and profit-loss (P&L) statements. 

Fortunately, you can acquire the necessary financial documents from your accounting software. 

At SBG Funding, the application process for invoice financing only takes three steps:

  1. Apply Online – We’ll ask a few preliminary questions in the online application to get to know your business and understand your creditworthiness.
  2. Get Approved – Congratulations! It only takes a few hours to get an approval. Once you do, you’re all good to go. 
  3. Receive Your Funds – Finally, accept your terms and disclosures for your financing. Then, your funds are on the way. 

If you’re facing a seasonal cash flow shortage, apply at SBG Funding today for invoice financing. 

Take Your Business to the Next Level With SBG Funding

Invoice financing gives small businesses access to fast cash by using their accounts receivable as collateral. Take control of your cash flow and receive the funding you need with SBG Funding. You’ll have a decision within 24 hours, so you’ll know whether this cash flow option is right for you. 
If you’re ready to submit your application for this financing solution, you’ve come to the right place. Apply today and begin the application in just a few minutes.

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