How Does Invoice Financing Work?

Starting a business involves new experiences and challenges. Perhaps the most significant hurdle is getting access to enough financing to fund operations, pay employees, and acquire customers. 

While there are various capital sources available to small business owners, most require some type of collateral. Risking your own money or personal belongings can be a hard pill to swallow.

Luckily, with solutions like invoice financing, small business owners and entrepreneurs don’t have to worry about debt financing or providing collateral. Invoice financing allows people to trade their unpaid invoices and contracts for upfront capital. 

In this blog post, we explain invoice financing and how this capital source benefits small businesses. Keep reading to learn how it can alleviate cash flow challenges and transform your organization. 

What is Invoice Financing?

Invoice financing, or accounts receivable financing, is a type of asset-based financing where small business owners can earn capital advance in exchange for their unpaid invoices. 

In short, invoices serve as collateral on the money you borrow. As a result, it often relieves problems with cash flow due to unpaid customer invoices. Therefore, this form of asset-based financing is an excellent funding option for small or service-based businesses. 

How Does Invoice Financing Work?

The process for invoice financing can vary depending on the third-party company you are working with. However, in most cases, it follows a similar process as outlined below.

• Step #1: A company sells a product and/or service to a customer. 
• Step #2: The company then creates an invoice to send to the customer. The payment terms often range from 30, 60, or 90+ days.
• Step #3: Although the company agreed to these payment terms, they cannot wait over a month to receive funds. Therefore, the business sells the invoice or contract through an invoice financing marketplace. 
• Step #4: The invoice financing marketplace connects the business with an investor who buys the invoice. 
• Step #5: The seller of the invoice is paid out immediately.
• Step #6: When the business’s client submits their final payment, the balance of the invoice is transferred back to the seller.

Example of Invoice Financing 

Let’s say you own a recruitment company. You have a contract with a grocery store to provide temporary staff to help during busier times of the year, such as the holidays. You give the grocery store a $75,000 invoice that must be paid off in 45-days. However, you need that money next week to pay your staff, resulting in a cash shortfall. 

At first, you think about going to the bank for a loan. The problem with this option is that it can take several months for the loan to close. So you’re back to square one. 

Then, you find a better alternative: invoice financing. An invoice financing marketplace, such as Crowdz, agrees to pay your invoice for $74,000 in cash ($75,000 minus a $1,000 financing fee). 

That money is in your pocket in two days. Now, you can pay your employees without having to change the payment terms of your client’s invoice abruptly.

What are the Benefits of Invoice Financing for Small Businesses? 

Get paid faster.

Many times, payment terms range from 30-days to 3-months. That can feel like centuries when you need that money now to fuel other aspects of your growing business. However, invoice financing provides fast access to working capital. In most situations, you can see that money in your account within a few days (sometimes even less). 

Invoice financing is not a loan.

Small business owners sell their invoices or subscription-based contracts in exchange for a lump sum of cash. The invoice financing company then owns the invoice and gets paid when it collects from your customers. Therefore, the invoices themselves serve as capital — not your personal property as with traditional bank loans.

Easier to qualify for than other methods of sourcing capital. 

Sure, you could turn to a bank for a loan. But bank loans require a near-perfect perfect credit score on top of collateral that the lender could sell if you default. Invoice financing is easier and more flexible to qualify for. Rather than just looking at your personal financials, investors evaluate your customers and their payment histories.

How to Get Started with Crowdz

Crowdz is a great solution for small businesses interested in selling their unpaid invoices for upfront capital. 

After registering on the Crowdz Marketplace, you can easily upload your invoices to the online marketplace and receive immediate payment. Small business owners can also agree on unique repayment terms depending on the amount.

And bam! Money is in your pocket within days without any of the challenges associated with traditional banking loans or other methods of sourcing capital. 

Check out Your Guide to Crowdz for more information.