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Invoice notes and terms example for Finance

selling invoices to improve cash flow is becoming a very popular business practice but keep in mind that there are different types of companies that you can sell these invoices to invoice factoring and invoice financing are often used interchangeably but they're not the same thing so today we're going to explore just what makes them different first let's take a look at what these two things have in common so if you have outstanding receivables and you're facing cash flow problems whether it's an invoice financing company or for an invoice factoring company you can sell these invoices to them for cash UPF front invoice financing and invoice factoring actually share a lot of advantages for example you won't have to go through a credit check because it's more important How likely your customers are to pay back also you won't have to put up any collateral because the invoices serve as collateral themselves you also tend to receive the cash pretty fast usually within a couple days and you no longer have to wait for your customers to pay you back cuz you get that cash and can immediately put it back into your business now let's talk about what makes each of these types of financing unique starting with invoice factoring so how does invoice factoring work well to begin the factoring company will purchase your outstanding receivables and then they'll give you an immediate cash advance usually the amount of a large majority of the total invoice balance then they take over the actual collection of the invoice so you don't have to worry about reaching out to your customers to get them to pay and then once the customer has paid they return the rest of the remaining balance minus their fees any business that has outstanding receivables can be a good candidate for invoice factoring the things they're going to look at are going to be things like the total amount of your invoice if you have larger invoices that's great but if you have smaller invoices it might be hard to factor those as well they're going to look at the credit worthiness of your customers because they don't want to advance you cash for someone who likely not to pay you back the most confusing part of invoice Factory is actually the fees associated with it so let's take a deeper dive into this so usually the factoring company will advance around 80% of the outstanding invoice total and keep the remaining 20% and from that they for sure take their processing fee which is a flat fee for doing the job it's usually around 3% and then from there they charge what's called a factor fee which is a percent rate based on the total amount of time that the invoice is outstanding so for some factors they do it daily others weekly so they charge a percent either per day or per week the invoice is outstanding and then once the customer pays the invoice they hand over the rest of that Reserve amount minus their fees to make it easier to understand let's look at an actual example so let's say you sell a $100,000 invoice to the factoring company so they upfront you $80,000 and hold on to the remaining $20,000 and then takes the customer two weeks to pay back so when they do pay back the factoring company takes their $3,000 fee plus their $2,000 Factor fee because they charged you 1% per week that they held the balance meaning that they pay you back $155,000 of the total Reserve hold on to $5,000 as their fee hopefully that helped to clarify just a bit but let's take some time to review everything we've learned about invoice factoring first of all the great things are that you get quick access to cash your invoices are the collateral and it's okay if you have bad credit but the cons are that you're going to have to pay higher fees than you would the traditional form of financing you're going to lose a portion of the profits you were supposed to earn and if your customers pay late it will cost you more so now that we've mastered invoice factoring let's take a look at what makes invoice financing unique so how does invoice financing work well to begin the financing companies will lend you money based on your outstand in receivables will charge you a monthly fee for the actual service and an interest rate for the amount you borrow and then you retain control over the collection of the invoice now this type of invoice financing is going to be harder to qualify for it tends to be better for larger businesses that have a consistent amount of receivables on their books as it is an ongoing relationship so the finance company is going to require things like regular reports on the sales ledger so they can determine how much to lend you ongoing and also regular reports on your credit Control process the fees associated with invoice financing are much more simple than with factoring what they'll do is they'll allow you to borrow up to around 80% of your outstanding invoice totals and then they'll charge a monthly fee for the actual service and an interest rate on the amount that you borrowed let's look at another example to clarify now the best way to think about this is It's like a revolving line of credit collateralized by your invoices so if you have $100,000 worth of outstanding invoices that means the finance company is going to allow you to borrow up to about $80,000 so your customers are paying you directly and as your outstanding receivables change the total you can borrow also changes proportionally so for this month you would pay $1,500 which is a 1.5% management fee on the total amount of outstanding invoices and let's say you also pay $3,400 which is the interest on the Lent amount let's say it's prime plus 1% for the month so definitely a bit easier to understand than factoring fees but to recap invoice financing some great things about it are the ongoing access to cash just like a line of credit the invoices again serving as collateral and lastly getting to maintain that relationship with customers when it comes to collecting those invoices but some things you want to watch out for are those smaller profit margins not being able to qualify for this type of business and lastly it affects affecting your ability to borrow traditionally so let's review factoring versus financing with invoice factoring you're going to sell your outstanding invoices in exchange for cash up front most businesses are going to qualify what matters most is the amount of the invoice that's going to save you time on managing collections as the factoring company will take over the collection of the invoice now with invoice financing or discounting think of it like a rolling line of credit that is collateralized by invoices it's going to be harder to qualify for this type of financing but it is an option that allows you to keep collections inhouse as the customers will pay you and you will pursue them for payment now these are just two options available to businesses that want to use their invoices to secure cash there's also a lot of online options available like a company called fundbox or a company called bluevine but no matter what if you're considering using invoices to improve your cash flow definitely research your options and understand the differences