How To Get Invoice Financing
How to Get Invoice Financing
For business owners wondering how to finance their small business operations and are in a business that generates invoices and receive payments from their customers based on payment terms, invoice financing may be a great alternative financing solution for you to use. Invoice Financing is amazingly helpful to businesses or business owners with temporary bad credit or low credit scores which may preclude them from acquiring the financing they may need for their business. In many ways I think that invoice financing is an ingenious tool which can work wonders for any business facing challenges.
What is Required to Apply for Invoice Factoring?
Many lenders typically look at the collateral and assets of the borrower. when in fact the business should be bearing the risk therefore it would only be sensible. The collateralization of the loan comes from the assets of the business. Though this may be the case it is up to the borrower to Showcase their creditworthiness and many times this comes in the form of a personal guarantee. This is what makes invoice financing so attractive.
- Proof of Ownership
- Accounts Recievable Ledger
- Payment Terms
Table of Invoice Financing Terms from your Capital Provider
What are the characteristics of Invoice Financing
|1||Line of Credit up to a Maximum amount (Based on the Capital Provider)|
|2||Typically less than 120 days (Based on Capital Provider)|
|3||Converts a percentage of the invoices value to Cash up front|
|4||Many non-recourse capital providers in existence|
|6||Usually 1% to 3% of the Advance amount (Per week / month, Based on the Capital Provider)|
|7||Advance to Invoice Value is usually up to 95% in some cases but usually 80%|
|8||Get financed based on your clients credit rather than your Credit, Business Revenue or Ebitda|
|9||Deals can be anywhere from $100k to $50 mil (Based on the Capital Provider)|
“For any business owner who may be in search of an alternative source of funding for their business, invoice factoring is one of the best ways to leverage the value of your sales and services?”
What’s beyond getting approved for Invoice Financing
Approval for Invoice Financing can be very straightforward and unglamourous, which may not be the right cup of tea for the fancy business banker but at the end of the day it gets the job done for the business owner in need of funding to keep their business going or to expand into another opportunity.
Too many times I think that leners miss the point regarding creating solutions that can work, and solutions which may be able to find value in a businesses activities in order to finance them.
And for this reason I believe has given rise to a subsector industry which no does exactly that.
As with any opportunity or industry underserved there will be eager onlookers waiting for their chance to maximize on the opportunity you are not.
How should a business owner approach a Loan Application?
Therefore, when the business owner is awarded financing from the Invoice Financing firm or sometimes called Supply Chain Capital Providers.
He should be all set and not have a worry in the world going forward.
Not so fast! As with everything in the financing world, every provider of capital, funds, cash, credit or whatever you want to call it, is going to build in a way to have security and minimize their risk as much as possible.
Some of the ways in which this is done are as follows:
- Advance Ceiling– The capital provider will definitely have a ceiling on the advance, and the reasons should be self explanatory. Due to the nature of the advance and it being backed by the creditworthiness of the client (your customer) and their history of payments, especially to you, is going to coincide with the receivable that needs to be collected. Meaning the advance is just not going to be more than the value of the Invoices.
- Rate– The rate which is chosen by invoice financing capital providers if generated on a case by case basis and is also heavily driven by market conditions and competitive rates within the market. Every company wants to make as much money as possible (And you can’t blame them. That is why we get into business. Unless it’s a non-profit). But again because of the simplicity of the model used to provide this type of solution the rate is going to be heavily guided by the client’s (Customer’s) credit and the value of your invoices.
- Services– As the Invoice Financing firm is going to be paid directly by your Client (Customer), they would also solidify more control over risk by accepting the task of collections and processing. Now think about this for a second. If a small company was thinking outside the box. A small business with no real back office, just you and your three cousins, might be the only back office you have. You could strategically acquire business through sales activities, provide your business services, generate the invoices for your customers, email the invoices to your Invoice Financing capital provider, get paid up front and let them handle the back office logistics of collections and monitoring of delinquent customers. This is a genius opportunity for any small business but it needs to be done right.
- Fees– service fees at times are charged the value of the invoice total value which can vary between 30 to 60 days aging and sometimes a varying percentage for another set value and aging time period beyond the 60 day aging. It is not uncommon for the fee to be set at 1% to 3% depending on the aggressiveness of the capital providers and an additional .5% for the periods beyond 60 days aging. They have to make money somehow. And frankly, how much would it cost you to hire an employee to have them sit in an office doing that for you.
- Due Diligence Cost– As with any business, a lender would want to investigate the entity they are about to risk money on and it is only right and prudent that some evaluation, verification and validation be executed on risk. The thing is that this is called due diligence and it takes time and man hours, with someone combing through the details of all the information the capital provider has been provided with. The person that does this most likely is not an unpaid intern or works for free. This person most likely is a W2 employee who has to be paid. Therefore there is sometimes a fee associated with the due diligence which may range between $200 to $500. Again this is a case by case situation and is up to the capital provider to absorb the cost or not, but just keep it in mind for future reference.
- Minimum Fee– There is a baseline fee with is calculated based on percentage with the criteria being if the monthly minimum fee to be paid is set as 1% of the Advance provided, then 1% whether set to be withdrawn from the payer’s account or not, will be the method of repayment to the capital provider until the advance is repaid. Capital Providers are taking a percentage of the future sales of the company and therefore they may choose to have this payment made either daily, weekly or monthly.
- Audit– A Capital Provider for invoice financing may from time to time require that an audit be executed and that cost is usually carried by the merchant. One may wonder why an audit would be needed by the capital provider after providing the merchant with the funds. This is to prevent and deter fraudulent activities where the capital provider is swindled out of their moneys with fake invoices and our fake clients.
- Term Sheet– The term sheet would be the legally binding agreement which outlines the details of the funding and itemizes all of the binding clauses both parties are in agreement with. This would have any covenants, payment specifications, conditions, constraints, restrictions, obligations, perfection, representation and warranties and confidentiality.
- Collateral– The first priority perfected security interest on the business accounts would be the main item being legally attached. They would most definitely want no other party to have first claim rights over the invoices, customer accounts, intangibles, books and records, proceeds or relevant contracts.
- Guarantees– There would also be a request made for a personal guarantee to be signed or a corporate guarantee signed by the holdings company if there is a parent company involved or the applying company is a subsidiary of another organization. The nature of the funding model places them in a position where precautions must be taken to secure their investment. In the cases of a personal guarantee, the intention is to ensure that the applicant is tied to the transaction in some way and carries some of the risk in the form of having something invested which they can possibly lose. Another reason for this is an individual putting up their own valuables would rarely risk losing their valuables to defraud another. Also in the event of loss the capital provider is not going to be the only party experiencing this pain. Though there are a number of providers who offer non-recourse funding which eliminates the need for a personal guarantee, which is usually done by them having Trade Credit Insurance which would take care of default, loss and other situations
It is not that much work to get invoice financing. Not all Banks or Lenders provide this as a solution to their clients. But many also do. They may not necessarily be accessible at your fingertips but that is what the internet is there for. There are firms popping up a lot more now and you can find them in mostly every State. So hold your head up. Get your receipts, invoices, contracts and paperwork.
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Over the five years to 2021, businesses have increasingly outsourced their IT infrastructure needs, directly benefiting industry operators.
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Industry revenue is expected to increase 1.7% in 2021, as the overall economy recovers from the economic fallout of the coronavirus pandemic.
Profit is expected to decline slightly over the five years to 2021, as growth earlier in the period is countered by declines in later years.
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Americans have been consuming less beer and opting for alternative alcoholic beverages.
However, the industry has continued to benefit from laws that prevent the vertical integration of breweries and retailers.
After the Prohibition era, nearly every state enacted a three-tier distribution system, requiring three distinct levels within the alcoholic beverage supply chain, including producer, distributor and retailer.
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Revenue has been on a steady growth during the five-year period.
However, the restrictions placed on the economy as a whole due to the COVID-19 (coronavirus) pandemic led to a decrease of 0.9% in 2020.
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