Invoice-based financing can take different forms depending on how your provider structures your arrangement.
Common invoice financing agreements include:
- One-time advances (similar to loans)
- Lines of credit
Both types of financing use your accounts receivable as collateral, but they differ in how you access your money and how you pay interest and other fees.
Invoice Financing One-Time Advances
When invoice financing is structured as a one-time advance, it works similarly to a loan, with a couple of important differences.
One major distinction from conventional loans is that a lump-sum invoice advance is backed by your unpaid accounts receivable alone, as opposed to other forms of collateral, such as a vehicle, inventory or property.
Additionally, you usually only receive a portion of your total accounts receivable balance. For one-time invoice financing advances, lenders are often willing to offer a loan-to-value ratio of 80%. Some providers, though, may advance the full amount in return for a higher fee.
Invoice Financing Example
For example, let’s say you have accounts receivable valued at $30,000. Your accounts receivable lender agrees to advance you $24,000, 80% of your AR value.
Your lender charges a 1.1 factor rate over a 24-week term. A factor rate is a multiplier used to determine your total repayment amount. For example, if you’re quoted a factor rate of 1.1 and you’re borrowing $24,000, you will repay $26,400 ($24,000 X 1.1 = $26,400). In addition, your lender charges a one-time processing fee, in this case 2% (24,000 X 0.02 = $480).
In total, you’ll pay back $26,880 ($26,400 + $480 = $26,880) over the course of your agreement, or $1,120 in equal weekly installments ($26,880 / 24 = $1,120).
Invoice Financing Lines of Credit
When invoice financing is structured as a line of credit, you receive access to an account with a limited amount of money you can borrow from. The amount is based on a percentage of the value of your invoices.
You pay interest based on the amount of your credit line you use. You may also be charged a fee per withdrawal.
When you repay money you borrow, it becomes available to spend again, which is why this type of financing is sometimes called a revolving line of credit.
In some cases, you might be required to pay back a portion of the amount you borrow on a weekly basis, and you may have a certain pay-back period in place, such as 12 or 24 weeks.