Invoice financing is done by leveraging a business’s unpaid invoices as collateral for a loan. It’s a short-term form of borrowing money to get a cash infusion into a business that’s waiting on outstanding payments from its customers.
There are two types of invoice financing—invoice factoring, and invoice discounting. With invoice factoring, the business sells its outstanding accounts receivable to a factoring company, which then collects the outstanding payment from the customer directly. Invoice discounting is a loan that uses the unpaid accounts receivable as collateral with the lender. Essentially, either invoice financing option gives business owners the freedom and ability to have more control of their finances when they’re waiting on repayment from a customer—albeit at a cost because the financing company does take fees.
Regardless of the type of invoice financing, the factoring company will approach a business’s request to finance their invoices in one of two ways. In the first, the factoring company will consider 1 or 2 of the invoices that a company wants to finance and check the credit history and creditworthiness of the few customers. If the credit history is acceptable, the financing company will advance the money to the business.
In the second, the financing company looks at an overview of all the outstanding accounts that a business wants to finance for general knowledge and an overview of the client base. Based on that summary, the invoice financing company will loan the business the cash that’s needed, and the invoices are used as collateral/a guarantee.
Some of the benefits for businesses who are interested in financing their accounts receivable are improved cash flow, renewed bargaining power with suppliers, and faster business growth due to more flexible payment timelines.
Invoice discounting is different than working with an invoice factoring company
Invoice discounting is a means of discounting outstanding invoices to use in exchange as collateral for a loan. The business will sell the outstanding invoice to a financing company, which will give them a loan for 80-90% of the total owed amount on the invoice. Businesses that use invoice discounting still collect payments from their customers and use that to repay the loan.
Invoice discounting is different than invoice factoring in a few ways. With factoring, companies will purchase the invoice and pay the business for the right to collect payment on it, rather than use the invoice as collateral for a loan. It’s for this reason that invoice discounting provides the business with more control because they can deal with their customers directly, and they don’t need to inform them of the business plan to finance their invoices. If a business would rather keep financial information private and away from their customers, invoice discounting might be a good option for them to consider.
To be able to use invoice discounting, the business must be able to afford the high fees that are associated with invoice discounting. The financing company earns money from the interest rate, and through a monthly fee that maintains the relationship between the business and the financing company. The amount of interest that’s charged on the loan is dependent on how much was loaned to the business.
Invoice discounting is common for high-profit businesses that are growing quickly and are using invoice discounting to grow their business, rather than to restore cash flow. For that reason, it’s not an ideal form of invoice financing for smaller businesses who are simply looking to restore cash flow, because the fees take away most of the potential for turning a profit.
Cash flow and small businesses
Naturally, invoice discounting accelerates cash flow to businesses. When accounts receivables are left unpaid, the business’s cash flow breaks down and the emphasis on growth is replaced by pressure to reinstate a steady flow of cash again. This is where invoice discounting can help a business maintain its growth.
In a typical arrangement without any financing, the business will need to wait for customers to send payment on the invoice to get a cash infusion—which can take anywhere from 30 to 120 days. Most businesses will need that money during the extended waiting period to pay employees and pay for services and supplies. For a business already low on working capital, they can bypass the waiting period by financing their invoices and get money back as soon as the invoice is sent out to the client.
Cash flow is an exceedingly important aspect of growth in any business—but especially in a small business. When businesses don’t have a large customer base yet, waiting for payment from their customers can be detrimental to the business’s growth and development. It can also make it harder for small businesses to cover staffing costs, and negotiate contracts with new clients who have payment preferences that don’t fit the business’s payment timeline.
For example, a client wants to send payment to the business every 120 days, but for that business to make payroll and pay off their suppliers, they need payment every 60 days. An invoice discounting company can lend them the cash upfront, which helps them improve their flexibility with clients and place their emphasis on growth, rather than survival.
Invoice factoring and receivable financing have been around for a while. They’re based on traditional credit checks and formulas that factoring companies and invoice discounting companies have been using for a long time—sometimes decades. Credit checks can be intrusive for customers, and, just like personal credit checks, having too many of them will have a negative impact on a credit report.
There is another solution that takes advantage of the developments in fintech that have happened over the last few years. It’s sometimes known as digital-net-terms, or net-terms-as-a-serve. Resolve is one company that works exclusively in this field.
Any B2B company working with customers in the US can choose to work with Resolve to address their financial business needs. When they do, Resolve conducts a discreet, or quiet credit check on a customer that has no impact on their operations or credit rating. The business receives a recommended credit limit to extend to their customer (or potential customer), as well as what net terms to offer them—30, 60, or 90 days.
This information is used to create reliable and sustainable net terms. When a sale is completed, Resolve will pay the business up to 90% of the value of the invoice within one day, while allowing the customer the full length of their net terms. These customers receive access to a payment portal branded with the business they’re working with where they can access all information about their account and make customer payments using a credit card, by bank transfer, ach, wire transfer, or even by mailing in a check. The portal is easily integrated with the business’ accounting software.
For many businesses, the only way to grow their customer base is to offer net payment terms—which is really a form of financing. Government agencies and other large purchasers only work with companies that offer net terms for the full amount of each invoice. Being set up to offer this is an excellent way to facilitate growth. Having the option of receiving payment for those invoices before 30, 60, or 90 days makes it manageable for almost every business.
How invoice discounting works!
Invoice discounting is a great way to help businesses expand their reach and take on new clients. It’s a confidential invoice discounting system—businesses can collect invoice payments from the customer directly, rather than having the client send payment to the finance company. This allows the business the freedom to choose whether they want to share their financial situation with their clients or not. When businesses don’t need to share their plans to finance invoices with their clients, it helps them present themselves as successful to their clients—one of the key advantages of invoice discounting.
Barring any late payment issues, using invoice discounting services is much more simplistic than applying for a standard small business loan or line of credit. Business loan applications usually ask for more than just outstanding invoices as collateral upfront, which can complicate things for a small business that doesn’t have many assets to leverage. Further, there are no minimum requirements for how often they discount their invoices. The ability to stop discounting invoices or begin again at any time is a great asset for startups and small business owners.
An intro to Triumph business capital and altline
Firstly, Triumph offers asset-based lending, equipment purchasing, and insurance to their clients, who are mostly trucking and freight businesses. They work with both small and large businesses, citing their ability to offer recourse and non-recourse factoring options, and are often referred to as one of the best factoring companies for this industry. Triumph’s only prerequisites cite that the businesses have a minimum credit score of 500, and annual revenue of $100,000. There’s no set loan amount, and no set factoring rates or loan terms.
When working with Triumph, businesses can see the status of the transactions in their online portal, and Triumph clients will receive a payment within 24 - 48 after an invoice is sent. Triumph also offers a fuel discount program. One downfall to working with Triumph as a finance solution is the lack of transparency when it comes to service fees/hidden fees because they’re non-standardized from client to client.
Altline—much like Triumph—is an invoice factoring company and is the commercial financing program of the Southern Bank. Altline is a direct financier, with a wide variety of factoring options, and rates as low as 0.50%. Other fees may be charged for speeding up funding or wire transfers. Altline is backed by a reliable banking institution, which can also mean that funds may not be as quick to arrive as they will with Triumph.
Altline doesn’t use credit scores as its primary method to decide which business to take on, but they do use credit scores to determine a business’s advanced rate. Factoring fees can cost anywhere from 0.5% to 3% for the first 30 days. If payment of a customer invoice isn’t sent within 30 days, the factoring fees will increase incrementally for 15 days until they cap out at 5%. Further, Altline doesn’t require businesses to pay an application fee.
What’s the best invoice solution?
There is no one-size-fits-all for business financing. What fits for a business that has large profit margins and is looking to invest in growth isn’t the same as a smaller business with the goal of reinstating cash flow into the business.
Invoice discounting is an option for a business with large profit margins because they can afford the associated fees and typically share the goal of growing their business. On the other hand, a smaller business may opt to use a company like Altline because of its exceedingly low fees. Resolve is a good fit for businesses of every size in every industry, regardless of the profit margins or invoice amount.
Simply put, to decide which form of invoice financing the use, the business must take a close look at whether it's financing for a cash infusion to keep the lights on, or if they’re financing to invest in their growth and work from there to find a company that fits their needs.