Invoice financing is also referred to as account receivable financing. It is a method of financing based on assets in which entrepreneurs get a capital advance in exchange for their unremunerated invoices. Generally, invoice financing firms can finance a person up to 85 percent of their invoices and get the remaining 15 percent when the invoices are remunerated. Generally, the types of invoice financing include accounts receivable lines of credit and invoice factoring.

How Does Invoice Financing Function?

Invoice financing differs from many financing loans designed as term loans, whereby a person gets a lump sum of capital and repays it for a certain period with interest. Although a business can get even 100 percent of their unpaid invoices, many invoice financing firms finance up to 85 percent and hold the remaining 15 percent until the payment of the invoices. When the client pays the invoice, the business receives the remaining 15 percent, less the lender charges. Generally, lenders charge a processing fee of about 3 percent plus the factoring fee of about 1 to 2 percent charged on the total invoice value for every week the client takes to pay.

What is the Cost of Invoice Financing?

The cost of invoice financing ranges from ten to sixty percent in approximated APR. Suppose a person has a $100,000 invoice with payment due in thirty days. In this case, the person will find a financing firm willing to advance them 85 percent while holding the rest 15 percent. The firm will charge a one percent factor rate for every week the client takes to pay the invoice, plus a three percent processing fee. If the customer takes two weeks to make the payment, the factoring fee will be $2,000 (2 percent), plus the $3,000 (3 percent) processing fee. Hence, of the $15,000 held by the financing firm, the person only receives $10,000. The invoice financing costs the person $5,000 of the original amount of the invoice. This equals an estimated APR of about 70 percent.

As an entrepreneur, invoice financing can guarantee smooth operations in your business when your clients delay their payments. Contact us today at DAL Commercial Capital for financial help.