If your customer will not pay for 30 or 60 days and you have already earned the money, that’s not always a sales problem; that’s a timing problem. There are two alternatives to solving this problem: either invoice financing for small business or a Small business cash advance. Although these two services provide cash before the customer pays, they are based on different methods of repayment. A company that has strong invoices can finance the receivable. On the other hand, a Small business cash advance may be more dependent on recent business deposits. The timing gap needs to be closed without creating a larger gap.

How Invoice Financing Helps Cash Flow

When a business sells a product or service to another business, payment is often made after goods are shipped, employees are paid, or a job site milestone is complete. Unfortunately, payroll and inventory suppliers need to be paid before the invoice due date, which might be 30, 45, or even 60 days after shipment.

Accounts receivable financing gap funding bridges the gap caused by accounts receivable and lack of cash flow. Businesses have the option to borrow against accounts receivable, or in some cases, sell accounts receivable to a factor. The financing offered varies with the specific service provider, and it may cover the percentage of the invoice, the company’s collection call obligation, fees, and whether the company assumes a financial risk if the customer does not pay the invoice.

SBA financing for working capital lines of credit may also be used to bridge the gap where working capital is limited, and accounts receivable and inventory may serve as the collateral.

Accounts receivable lending is designed so that repayment of the financing is correlated to the cash flow of the customer payment that created the financing gap.

The aging report is critical because not all invoices are equally financeable. A current invoice from a dependable commercial customer may be perceived very differently from an invoice that has already been significantly past due. The advance a provider will likely make against an account that is a high percentage of total receivables will likely be limited. Owners should examine their receivables portfolio pbeforeconsidering the full expected value of invoices realized in cash.

How Small Business Cash Advances Differ

Unlike invoice-based financing, many Small business cash advance products do not require the borrower to have an outstanding, yet-to-be-paid invoice. Instead, cash advance lenders consider a borrower’s sales history, recent bank deposits, and payment processing activity to determine the value of a cash advance loan. This structure enables these loans to be cash advance loans, even in instances where the business lacks invoices that qualify for a receivables-financing program.

These advance products claim to move quickly. The consequences of this speed are that, although the financing may be used to pay payroll or procure supplies while customers pay, the funding may be immediately due for repayment and recouped on a daily or weekly basis.

This structure is especially problematic when, as the name suggests, receivables are delayed. Businesses facing financing these cash advances when a $75,000 customer invoice is 30 days old may have the financing recouped on a daily basis and have their cash balances wiped out each day they wait for financing. The financing may close the gap, but the financing may make the gap feel larger.

Prospective borrowers evaluating these financing solutions should look at the total financing cost, the true APR or annualized cost where available, the cost per funding, the frequency of repayment, and the effect of having customers pay after the expected date.

Invoice Financing vs. Fast Cash-Advance Funding

The first thing to know here is the financing option and how each works. A business can borrow against or sell outstanding invoices in accounts receivable financing, whereas funding from a Small business cash advance is based on expected business revenue, more broadly.

The second thing to consider is timing. Receivables financing, in this case, requires more documentation. The financing provider has to vet the invoices and potentially the aging report and the concentration risk. In contrast, a cash advance, in this case, may take less time because the underwriting is more based on the business’s deposits.

The third thing to consider is how much cash flow pressure there is. If the financing is based on selling invoices, then the financing provider will likely collect after the invoice sells. In the case of cash advances, you could have repeated cash withdrawals before the customer who created the cash flow gap pays. This creates a conflict for financing collections versus payroll or supplier obligations.

The fourth thing to consider is the quality of the customer. An invoice financing provider is more likely to finance a business with bigger, creditworthy business-to-business customers. A consumer-facing business, with no business-to-business customers, may not have much to finance through invoicing. In this situation, the business needs to look at other working capital options.

Which Businesses Are Better Candidates for Invoice Financing?

Invoice financing often assists businesses that sell on terms to other businesses or government entities. Staffing, manufacturing, wholesale, transportation, business services, and some contracting may qualify since they may pay suppliers or labor many weeks before the customer pays the invoice.

The receivable also has to be of good quality. Providers review the age of the invoices, the customer payment history, whether a single customer makes up the bulk of the receivables balance, whether there are outstanding issues or offsets, and whether the receivables are contested. Companies offering clean, current invoices pose less of a risk than companies financing very old or contested receivables.

The business should consider the cost of waiting. If a company can take an order that would otherwise be profitable with financing of invoices, then financing would have immediate value. If the financing would simply replace cash used to pay high obligations, then financing may be too expensive.

Also important are the terms of the contracts. Retention, customer concentration, disputes, offsets, return rights, and contingent approvals can weigh on the eligibility of a receivable. A business applying for financing should understand these terms since it would help the business estimate approximating the amount that will be made available to them and also helps accurately determine when cash will be advanced.

Choosing Based on Receivables and Cash Flow

Money Man 4 Business helps owners compare the pros and cons of working capital, invoice financing, term, SBA, line-of-credit, and consolidation options. Cash flow concerns created by delays in cash inflows from sales can be addressed in a number of different ways, including cash inflows from inventory that is sold, financed cash out from equipment purchases, and finance cash out from debt refinancing to address an operations funding shortfall.

Adding more new capital to a business may be less beneficial than refinancing the cash flow if the business has multiple cash advances. Money Man 4 Business says customers of its consolidation programs are often able to lower the costs associated with their high-interest cash advances by two-thirds or more. Similar term programs can be as long as 25 years, subject to underwriting.

A CFO with over 30 years of experience personally reviews the aging of receivables, the existing debt, and the cash inflows needed to cover existing monthly cash outflows to help business owners avoid the constant pressure of financing short term cash inflow solutions to avoid the cash flow shortages created by a 45 day invoice reliance payment structure.

Frequently Asked Questions

Is invoice financing the same as factoring?
Not always. Factoring generally involves selling receivables to a factor, while other receivables-financing structures may use invoices as collateral for a loan or line. The exact structure varies by provider.

Can Fast business funding be useful while customers are paying slowly?
Yes, but the owner should compare how frequently the financing must be repaid with the expected timing of customer collections.

What information is commonly reviewed for invoice financing?
Providers may review invoices, customer quality, aging reports, concentration, payment history, business financials, and other underwriting information.

Use the Receivable to Solve the Receivable Problem

Financing ought to provide a way to address the time lag between work completion and collection. In that respect, invoice financing for small business and accounts receivable financing come in handy where the problem concerns unpaid commercial invoices.

A Small business cash advance may still offer speed, but the owner ought to get acquainted with how daily or weekly collections may affect the business, while customers take their time to pay. Money Man 4 Business provides a way for business owners to compare different aspects of receivables-based financing, Fast business funding, monthly-payment programs, and consolidation to help cash flow and avoid competing against cash flow for solutions.