Invoice financing, is a type of financing that allows business owners to be get their invoices paid quicker than their customer pay. Otherwise, they would likely be waiting 30-90 days to receive a payment. Many people sometimes call it "Invoice Factoring" or "Accounts Receivable Financing which is accurate as well.
Let's suppose you send a client a $15,000 invoice with 30-day payment terms. Some financing company may advance you 80-90% of that amount right away. That works out to $12,000, and they hold the remaining balance of $3,000 in reserve.
Once the invoice is paid by the customer to the finance company three weeks later. After the financing company deducts their factoring fee of 1% per week, which in this example is 3% or $450, they also subtract out their 3% processing fee of $450, and then give you the leftover from the $3,000 reserve.
Basically, you've paid a fee of $900 from your $15,000 invoice. You got the $12,000 in advance, and you paid a convenience fee of $900. This is a excellent method to get cash from your business' accounts receivable invoices when you need it quicker than 30 or 45 days.
When you need money quickly from your business, this is an ideal way to go. In just one to three business days you can have the advance in your bank account. The fees are minimal, usually from 1% to 3% of the total invoice as well as more processing fees.
The invoices themselves serves as collateral for the factoring company. When your business began or your credit score and history is not a factor. The factoring company's main concern is the customer or business that owes the funds on the invoice.
Typically, the company wants a business owner that gets a monthly average of $50,000 on their accounts receivable ledger, however exceptions may be made.
Ohh la la lah. owners who do not want to put up collateral to get approved for a LOC, there are unsecured credit lines which don't require collateral. The credit history and the profits of the business are the major factors which will be used to either qualify or disqualify the business. It is not uncommon for a brand new company with a brief operating history still be approved for amounts ranging from $25,000 to $100,000 along with the owner or partner of the company having a good credit profile.
On the other hand, if it's a more established business with annual income ranging from $1,000,000 to $10,000,000 along with good credit they can expect to be offered a line of credit from $100,000 - $500,000 without collateral.