The 5 Types of Invoice Financing | Behalf
The 5 Types of Invoice Financing
Chances are if you’re reading this article you are actively shopping around for business financing. That means you are already up to your ears in financial jargon. Of course you want to make an educated decision, but there are so many types of business financing solutions to keep track of. If this is your current dilemma, you are not alone. In fact, there are entire blogs and forums – like this one – dedicated to helping professionals navigate the world of business financing. These online platforms are great tools for you to use in your search and will help you avoid choosing the wrong financial product. Yet, there are many intricacies to business financing that your first cursory overviews will not cover. Invoice Financing, in particular, is a financing method that tends to get glossed over.
Invoice financing is typically broad brushed as the expensive, inconvenient way to finance a business. Like all types of financing, the financial product itself is only as good as its service provider. And when it comes to Invoice Financing, a few unscrupulous providers have given the product a bad name. As such, bloggers make hasty reviews about invoice financing and write it off without much consideration.
Companies historically have turned to invoice financing when they experience a working capital shortage due to slow or late paying customers. They sell invoices to lenders for a fast cash advance. Invoice financing is not the only way to remedy this sort of cash flow gap, but it is a diverse category of business financing that might fit your company’s needs. This article investigates 5 methods of invoice financing, as well as a promising alternative. After reading this you should be able to make an educated business decision about which type of financing best suits your company’s needs.
1) Invoice Factoring
In many cases, invoice financing is used interchangeably with invoice factoring, but there is a difference. Invoice factoring is unique because factoring companies will not only advance cash to your company, they also handle your company’s collections. In other words, your customers pay the factoring company directly. In some ways, this is a blessing and a curse. Though it is less work for your accounts receivable department, this method of invoice financing can be disruptive to the customer’s journey. Customer relations are a delicate matter and not all factoring companies will handle your customers the way you do.
Discounting, a.k.a “confidential invoice financing,” is a less disruptive form of invoice financing, because customers are not aware of the fact your company is doing it. Discounting customer invoices also involves selling invoices for an advance, but the lender collects as if they are a part of your company. The customer journey may be smoother, without the apparent intervention of a factoring company between you and your accounts. This method also reduces your accounts receivable department workload, similar to factoring. This type of invoice financing focuses more on your customers’ creditworthiness and underwrites your entire portfolio of customers at once. It tends to be a better play for large, more established companies with established customer bases.
3) Selective Invoice Financing
Selective invoice financing offers companies more control over which invoices they sell for an advance. Instead of submitting your entire sales ledger worth of invoices to the lender, you can decide which customer’s invoices you want to sell. It is typically more advantageous to finance a big customer’s invoices than a small one’s. So depending on your customer base, you will want to be able to thoughtfully segment which to keep and which to sell. Like discounting, the customer’s creditworthiness plays a larger role in the lender’s approval process, but your accounts receivable department must make the collections. In this case, you are mitigating your write-off risk, but still doing the work of collections.
4) Spot Factoring
Instead of selecting which customer’s invoices you submit to your lender, you submit specific invoices. This type of invoice financing offers even more control than selective invoice financing and the lender takes care of collections. Costs are typically higher with this method – you pay for the convenience and control.
5) Auctioning Online
If you would like even more control over your invoice financing experience, consider auctioning your company’s invoices online. Similarly to spot factoring, you can choose which particular invoice you want to finance. Simply upload your invoices to an online platform, where lenders can bid for them.
Perhaps after reading this article you are still not sure invoice financing is a good commitment for your company to make. There are more affordable financing solutions that help companies get through these scenarios and more. Consider eliminating collections completely and accelerating all your receivables by offering your customers third party financing. For example, when you invite customers to pay you with a Behalf business purchasing line of credit, you increase their buying power and empower them to choose their own payment terms. It is a win-win: you will get paid instantly and your customers can extend their timeline for payment up to six months. With Behalf, you don’t have to sell your receivables to get paid fast.
Learn more about how Behalf is transforming the way businesses buy and sell here.