Accounts receivable financing has the potential to be a boon for small business and the most popular cash flow management tool out there in the very near future. In the meantime, most people haven’t heard of invoice financing. It’s already a go-to solution for bigger companies in industries where operating capital can sometimes get a little tight like in the telecom and transportation industries.
Exciting developments in the financial technology sector are making more of these sophisticated financial instruments available to small businesses owners, freelancers and contractors. One of the examples is the provision of funding – e.g. invoice financing – via a cloud-based invoicing platform.
Let’s talk about why these options aren’t being used that much by small business owners.
Invoice factoring issues: They aren’t about the platform
The problem with invoice financing is actually not in the tech platform that help provisioning the financing easier, but in the inherited financing model.
Invoice financing or the process of getting access to cash that is coming from your invoices early has been conflated with invoice factoring. Invoice factoring doesn’t enjoy a very good reputation. Because factoring traditionally means that the factoring partner collects directly from your client, your business relationships can get a little complicated.
Whether a third party represents themselves as you or as a 3rd party, you might not be exactly on the same page as they are about how they should collect, but as soon as you start taking their money, you lose the ability to control that aspect of the relationship with your client.
Something else to consider about factoring is the headache and worry that you might suffer from when your customer starts asking questions about why you need to use invoice factoring at all. It isn’t any of their business but it can become an optics problem around your business’ long-term viability.
How to apply and qualify?
Which product is best for you depends on how big your company is, how setup you are to withstand financially lean periods and what your own personal risk preference is. Invoice financing can be used by companies of any size – including startups with a limited sales history.
Qualifying for financing is relatively simple and quick. More importantly, if you hold out for an invoice financing arrangement where the credit provider collects from you directly, your clients really never need know that you got a little help to see your way to the next paid invoice. If you have unencumbered accounts receivable and a company takes a chance on you, you don’t need to worry about the creditworthiness of your clients just your own ability to repay the cash advance.
Unlike with invoice factoring where you can typically borrow up to 85% of the invoice amount, invoice financing lets you can get 100% of the invoice amount upfront (minus a possible origination fee) because accounts receivable financing functions in a similar way to a normal line of credit.
A HELOC would be a line of credit secured by the equity in your home and in the case of invoice financing, you are securing a line of credit against possible future invoices that you might send or against current outstanding invoices that will get paid in the future. This useful options allows your company to draw funds as you invoice clients and pay the line down as customers pay their invoices.
The cloud makes factoring and financing easy
It is hard to speak in definitive terms about how much you will end up paying for a line of credit and access to this kind of borrowing against invoices without getting specific about the offering. ZipBooks’ Invoice Instant Payments™ is one of several lending solutions that can help you better manage your cash flow and your business’ financial health.
One you have applied and received a line of credit, ZipBooks gives you the option to finance an invoice. That means if you have a invoice due in the future, but would like to get paid on it today, you can get it funded with a click of a button inside ZipBooks. They send 100% of the value of the invoice to your bank account (minus an origination fee) within 1-2 business days through a bank-to-bank transfer service called Dwolla. Dwolla helps ZipBooks facilitate repayment over 12 weeks at .5% per week. Unlike with factoring, you can choose to repay the amount in full after the first week without any prepayment penalty.
Signing up for ZipBooks is free and they even include a complimentary cloud-based invoicing and accounting software wrapped around their ability to make cash advances. There are many other providers that you can find out there by googling “invoice financing company” but ZipBooks is the only option that throws in a lot of freebie on top of being a finance company.