What is invoice funding & how does it work?

Running a small business isn’t always easy, especially when it comes to managing finances and cash flow. While an ideal world would see customers stay on top of their invoices and make payments promptly, the reality is that oftentimes a business’s cash flow can end up tied up in unpaid invoices.

Exploring alternative funding options can help avoid unnecessary stress on the business and help stay on top of expenses. One popular funding option for small businesses is invoice funding.

What is Invoice Funding?

Invoice funding, also referred to as invoice financing, accounts receivable financing, or an invoice funding loan, is a financial solution specifically created to improve cash flow for businesses dealing with unpaid invoices.

Instead of waiting for customers to pay their invoices, a business can sell their unpaid invoices to a funding company, often referred to as a ‘factor’. The factor will advance a portion of the invoice value, typically ranging from 70% to 90%, back to the business straight away. Once the customer pays the invoice, the factor will deduct a small fee, and release the remaining balance to the business.

How Does Invoice Funding Work?

1. Applying for Financing

Before a business can obtain invoice funding, they’ll need to apply for financing with a lending specialist. The role of a lending specialist in this situation is to act as an intermediary between the business and the lender, facilitating and streamlining the funding process.

2. Submitting Invoices

Once the business has been approved for invoice funding, a reputable brokerage like Fox Finance Group will work with the business to prepare and submit the outstanding invoices to the lender. The lending specialist/broker can also provide guidance on gathering and submitting any relevant supporting documentation to ensure they meet all the lender’s requirements.

Once submitted, the lender will carefully review the invoices to confirm their validity and evaluate the creditworthiness of the customers linked to those invoices.

3. Receiving Funding

If the lender approves the business’s application for invoice funding, they’ll receive confirmation via their designated lending specialist at Fox Finance Group. The lender will then advance a percentage of the invoice value to the business, usually within 24 to 48 hours. This provides the business with immediate cash flow to cover expenses, pay employees, or invest in growth opportunities.

4. Customer Payment

Once invoice funding has been confirmed, customers will be required to pay their invoices directly to the lender. Upon receipt, the lender will release the remaining balance to the business, minus the value of the nominated service fee. The invoice funding service fee is typically nominated by the lender, and is based on the invoice value and the timeframe within which the customer settles the payment.

Advantages of Invoice Funding

The main benefit of invoice funding for small businesses is immediate access to cash. By converting outstanding invoices into cash, businesses are able to cover expenses, meet financial obligations, and invest in operations or inventory without having to wait for customer payments. Since the lender assumes the responsibility of collecting payment, businesses can focus on their core operations without the burden of chasing late or non-paying customers.

Invoice Funding Eligibility and Requirements

To qualify for invoice funding, businesses need to meet certain eligibility requirements. While specific requirements may vary, common considerations include: the creditworthiness of the business and its customers, the volume and quality of the invoices, and the business’s financial stability.

How To Improve Your Invoice Funding Eligibility

There are a few ways a small business can improve their chances of obtaining invoice funding, such as:

• Maintaining good credit: Ensuring the business has a strong credit history and pays bills on time. This will demonstrate that the business is able to manage financial obligations responsibly.
• Establish a solid business history: Lenders often prefer working with businesses that have been operating for a certain period, typically at least six months. Establishing a track record of stable operations can improve the likelihood of qualifying for invoice funding.
• Increase invoice volume: Lenders assess the quality and quantity of a business’s outstanding invoices. Increasing a business’s invoice volume can demonstrate growth and attract favourable financing terms.

Choosing the Right Finance Broker

Working with the right finance broker is essential to obtaining the best invoice funding solution for any business. It’s best to work with a lending specialist who has extensive experience in invoice funding and a track record of helping businesses secure financing. A knowledgeable brokerage like Fox Finance Group should also be able to provide valuable guidance and support throughout every step of the invoice funding process.

It’s also important to ensure that the finance brokerage you approach has established relationships with a wide range of lenders, and this will enable them to match the business with the most suitable product based on the industry, invoice volume, and specific needs.

Key Takeaways

Invoice funding offers an excellent solution for small businesses seeking to improve cash flow, boost working capital, and minimise risk. By gaining access to immediate funds, businesses can concentrate on growth prospects and expansion without the hassle of chasing unpaid invoices.

Working with a finance broker can help streamline the invoice funding loan application process and ensure the best possible outcome.

At Fox Finance Group, our team of experienced lending brokers are readily available to evaluate your business’s financial needs and help kickstart your invoice funding application.

Don’t let outstanding invoices hinder your business growth. Schedule a consultation or apply for invoice funding today.