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In a time when small businesses feel the crunch from built up credit, businesses will often turn to alternative ways to continue to grow and prosper. Even with a decent credit score, banks are still reluctant to provide a business loan and make the process more difficult than what it needs to be. More often you can see many businesses opting for invoice financing. But what is invoice financing? And is right for your business?

According to Investopedia, invoice financing is a type of short-term borrowing option when businesses go to third-party lenders to borrow money in order to pay outstanding invoices from customers. Often customers will use credit to buy a businesses’ goods or services.

Before that credit is paid off by the customer, businesses may find themselves feeling tight on funds.  Through invoice financing, businesses will receive immediate funding that they can use towards expenses such as paying suppliers and staff or increase working capital.

Invoice financing can be arranged in a variety of ways, but the most common forms are through factoring or discounting. Invoice factoring is when a business will sell their unpaid invoice to a lender. The 3rd party lender will then take on the role of collecting payments from customers, thus making customers aware of the arrangement. On the other hand, invoice discounting is when the business who is seeking invoice financing will remain in control of collecting payments from the customers.

Businesses that opt for invoice financing are typically found in industries such as construction, manufacturing, or wholesalers. Invoice factoring is also a popular choice for startups, growing businesses, and struggling businesses.

Qualifying for invoice financing is relatively easy compared to traditional methods. There are, however, a few essential requirements. One requirement is that your company must sell goods or services to other business on terms. Another requirement is to have account receivables from creditworthy clients. Lastly, most lenders often require you make at least 5 thousand in sales each month.

If you find your business falling tight on working capital and are able to check of these requirements, you may want to consider invoice financing as your next option for funding.