One of the challenges of running a small business is that every dollar counts. This means that while paying by credit card may be convenient for your customers, it likely isn’t as convenient for your business, which winds up paying service fees as high as 3% in order to receive your money quickly.

Yuck.

But what if I told you there was a better way to get paid – and with lower fees to boot?

Invoice financing.

If you’ve never heard of it, keep reading. After learning how much extra cash this method of payment could mean for your small business, you’ll want to ditch credit cards forever.

Read our complete guide on How to Write an Invoice and the best practices for getting paid faster

What is invoice financing?

Invoice financing is a way for business to borrow money from a lender based on amounts due from customers.

So how does it work? Your invoice is an accounts receivable. Even though you haven’t been paid on it yet, it still has value. You can wait to realize the full value of that invoice when it gets paid in 30, 60, or 90 days, or you can sell unpaid invoices to financing companies.

Essentially, your businesses uses an invoice as collateral in exchange for receiving a cash advance for the amount of the invoice. You are then responsible for collecting the invoice from the customer and repaying the lender later.

Invoice factoring vs financing

Invoice financing and factoring perform similar functions, with a few distinctions.  

With invoice financing, you put your invoices up as collateral for a line of credit.  With invoice factoring, you sell invoices for immediate cash. Invoice factoring is not a loan, but a purchase of your accounts receivables.

With invoice financing, you maintain the responsibility for collecting the amount of unpaid invoices. With invoice factoring, the factoring company is responsible for collecting invoice payments. However, there is no guarantee of collection—you have to trust that the factoring company will successfully collect unpaid invoices from customers on your behalf. Both services charge a fee of around 3%, it just depends on who you want to be in charge of collection.

Here are four ways that invoice financing can grow your small business:

1. Gets you fast cash – Invoice financing allows you to get paid by the lender for the amount of the invoice the next day and pay back the amount of the cash advance over time, rather than waiting for the credit card company to pay out. This solves many problems for small business, which are often strapped for cash while they wait for to be paid.
2. Allows you to work with bigger clients – Large companies often require longer terms to pay what they owe you. Through invoice financing, you won’t be worried about how you’ll keep the lights on –– you’ll have the budget room to wait longer for these clients to pay, while also growing your client base.
3. Gives you cash flow to grow your company – Getting paid upfront by the lender gives you the freedom to invest in growing your company, instead of having to put all of your money back into overhead costs. For you, this may mean being able to expand your service offering, open a new store location, or hire and pay additional employees.
4. Saves you money in the long run – A typical interest rate for invoice financing is usually around .5%/week. This means, if you pay off an advance on an invoice within 30 days, you’ll end up paying 1% less than you would if you had gone through a credit card company.

How much does invoice financing cost?

Invoice financing can have higher fees than traditional financing, but it’s the cost of having money on hand now, rather than later.  

Most financing companies will advance you about 85% of the value of your invoices and hold the rest in reserve until your customer sends payment.  Invoice lenders collect a processing fee (typically around 3%) and can charge a factor fee as well, depending on how long it takes your customer to pay.  

While these percentages can add up, the benefit to your business can often be worth the price. The predictable cash flow provided by invoicing is what you’re paying for, a convenience fee for your business’ working capital.

Where do I start?

If you currently have outstanding receivables, you can qualify for invoice financing.  Most services offer streamlined, online applications with quick turnaround. Because existing invoices act as the loan’s collateral, you are more likely to qualify for invoice financing—though some companies may look at your credit report too.

Invoice financing and factoring companies (like Fundbox and BlueVine, respectively) will typically connect to your business’s accounting program (that’s us!).  Because you have clean and professional invoices neatly organized in ZipBooks, it will be easy for you to share your accounts receivables and get cash right away!

Is invoice financing right for your business?

Is your cashflow all over the place? Would you benefit from a smooth stream of cash running directly into your accounts receivable?

Don’t be duped into thinking old school. Consider the cost of bank overdraft, credit card fees or even a handout from your local loan shark. Sure, you make someone else happy by throwing your money away, but does it really help you run a successful business?

Think new school with invoice financing. With 100% of the original invoice coming to your bank account at the snap of your fingers, it’s easy to see which choice is best. One-half of one percent in interest per week is much cheaper than processing a credit card. Sometimes getting a few hundred more Delta SkyMiles just isn’t worth a fat credit card fee.

Because technology has made online money transfers easy for anyone, invoice financing is worth exploring into if you’re looking to grow your business. Getting paid faster with fewer fees means more money in your pocket. And who doesn’t like a little extra cash?