Chances are, if you’re already looking at the different types of business invoice financing, you’re in the market for one. One of the advantages of invoice financing is its ability to provide entrepreneurs with the cash needed for business operations. They’re not incurring more debt, for the simple reason, they’re not borrowing, they are rather selling their outstanding invoices to lending companies.
If you’re one of the businesses that have to wait weeks before getting paid, then this is can be the absolute best funding option for you.
But what are the different types available out there? Businesses have unique needs and therefore, require different funding options. A sticking point regarding business loans is the fact they do not come in a one-size-fits-all. Each has its own unique purpose and use.
Due to this, many business owners turn to invoice financing in order to solve short-term cash problems and deal with late-paying customers.
Since most don’t have the luxury of waiting for weeks for the cash to come in, they are forced to find alternative ways to solve short-term cash flow issues. However, choosing which type of invoice financing to choose, can be a challenge, especially for those who have never been exposed to this type of funding.
Here are the 4 types of invoice financing available for businesses that will shed light on the industry and the process of acquiring invoice financing.
-
Invoice Factoring
Factoring is the most popular type of invoice financing used by a lot of enterprises. In this case, the invoice factoring company will take over your entire invoice ledger. In return, businesses will receive a lump sum upfront for the invoices. The company will also handle all the payment collections so, essentially, your customers will know that you’re making use of factoring companies.
When you sell your outstanding invoices to factoring companies, they can provide financing up to 80% to 100% of the total of all invoices. Since they’ll be the ones to handle collection, your customer’s payments will have to pass through them first.
They will then deduct the money you got in advance plus the fees and other charges associated with the transaction. The remaining balance of your customer’s payment will be forwarded to you.
With invoice financing, you’ll get the luxury of creating a stable cash flow for your company. At the same time, you’ll also free yourself from the hassle of chasing customers for payments. All you have to do in this type of transaction is to ensure that your customers are trusted and credible.
2. Invoice Discounting
The second most common type of invoice financing is invoice discounting, otherwise known as confidential invoice financing. In this scenario, the lenders will buy your customer’s unpaid invoices and give you the cash in exchange for the invoices. But unlike invoice factoring, in this arrangement, the discounting company won’t handle the payment collection. The business will, instead, do the payment chasing.
On the upside, the company will have full control of their company’s ledgers. So, the customers won’t know that the business is using the services of a third-party company. Once they receive the payments from their customers, they will pay the discounting company themselves. Invoice discounting is the best financing option for business owners who prefer dealing with their customers directly.
3. Selective Invoice Financing
As the name implies, this type of invoice financing lets you select the invoices you want to sell to the lending company. Some companies may select the invoices of customers who made large purchases. This is a perfect solution for people who do not want to liquidate all their invoices at once.
The cash you get from the invoice financing company can be used to cover any gaps in your cash flow which was used to fund the large order. Since it typically takes at least 4 to 8 weeks for the customer to pay, businesses can get the cash for that invoice in advance through selective invoice financing.
Like other types of invoice financing, the customer’s creditworthiness plays a huge part in this deal. Typically, businesses should ensure that their customers have a good credit background before applying for this type of financing.
4. Spot Factoring
Similarly, spot factoring is a type of invoice factoring that allows companies to pick one invoice they want to sell. In most cases, companies usually sell invoices with large unpaid amounts. Cash flow gaps tend to happen to businesses that supply a bulk service or products to other businesses.
Instead of waiting for a few weeks for the invoice to be paid, they sell their customer’s unpaid invoices in exchange for cash up front.
In this arrangement, the spot factoring company will also do the payment collection for that particular customer. They will then deduct the cash you got in advance plus the fees associated with the transaction. Usually, spot factoring is a one-time business transaction.
What Type of Business Invoice Financing is Right for You?
Different types of invoices are used for different purposes. Knowing what your company currently needs helps in determining what type of business invoice financing is just right for you.
By choosing the right type of invoice financing, you can boost your company’s cash flow and, at the same time, keep your customers happy for a long time. A win-win arrangement.