How much does it cost to finance my business using invoice financing?

Maybe you have heard that by utilizing your outstanding invoices as leverage to finance your business you can gain access to much needed capital?

This may make the difference to your business between growing and moving forward or remaining stagnant and letting the competition pass you by. 

It is pretty simple really, calculating the overall finance costs vs. not taking advantage of every tool available to get keep your business moving forward. 

First off Invoice financing is pretty transparent, typically with the majority of respectable business finance companies there are no upfront fees. There should be no application fees as well. Any company that asks you to pay for financial background checks etc. is probably a scam or if not an outright scam then they are the bottom of the professional Invoice Factoring Barrel.  

First off we can look at the Discount Rate. The Discount Rate is the primary cost of borrowing money from the finance company.  The industry average is 1.5 % – 5 % of the invoice value per month. Businesses with larger invoice volume and that have built up a history with the factor can often qualify for better rates. 

2^nd there is the length of time or length of Financing Period.  Discount rates are charged at regular intervals (usually monthly), so the length of time it takes for the customer to pay your invoice will determine your cost.

Here is a Working Example of Invoice Financing Costs. Let’s illustrate the terms above with an example. Suppose you factor a $10,000 invoice at an advance rate of 85% and a discount rate of 3% per month. In this case, you would receive $8,500 upfront. If your client makes full payment on the invoice in 30 days, the factor will pay you the remaining $1,200 you are due, bringing the total amount you receive to $9,700. The remaining $300 is kept by the factor as their fee.

Invoice Financing is not a bank loan, it is pledging outstanding invoices on completed work or delivered services in exchange for working capital up front.  In this case you can see that there is no loan to pay back so interest rate formulas do not apply here.

If you are trying to calculate the borrowing costs you really have to look at the cost of not having access to working capital. 

Let’s say you have a customer that really needs a big supply of T-Shirts you manufacture the type he needs but with the current equipment you have you cannot meet the capacity to manufacture his quantity. There is outsourcing, which is to ask a competitor to  supply you with the amount you cannot supply or there is utilizing your outstanding invoices to obtain the capital needed to purchase equipment necessary to complete this and or future orders.

It really always comes down to where is your business in it’s growth stage and are you comfortable with the amount of capital you have available to take advantage of opportunities when they arise. 

If your business has outstanding invoices on completed work or delivered services and you are in need of capital to grow or expand your business contact NorthWest Finance. An easy way to finance your invoices.

Fuel Business Finance

Minneapolis, St Paul and Across the US

612-327-5756

www.businessfinancingfast.com

Invoice Financing | Purchase Order Financing | Merchant Cash Advances | Business Equipment Lease Financing