The act of collecting, or paying, money to another party can be done in a number of ways, both formal or informal. A phone call to a supplier or an IOU written on a napkin can be just as binding as a written contract if it has all the features of one, but written documents are generally preferred! Napkin or dossier, invoices usually contain a record of the amount owing or owed, the payment terms, and any additional information (for example, local tax). Together, these invoices make up the businesses’ receivables or payables.

Why Use Invoice Funding, Invoice Factoring, or Invoice Financing?

Tracking the money going into the business via its receivables and the money leaving the business via its payables can give an interested party a fairly detailed view of the business’ financial health. Invoices offer a short term look at a company’s feasibility into the near future, which is why the current ratio, or quick ratio, is often helpful. These short term capital needs are why many businesses choose to finance, fund, or factor invoices.

What is Invoice Factoring?

All three options discussed here—invoice financing, Invoice Funding, and invoice factoring—involve one of two options: delaying payments to suppliers or speeding up payments from customers. Invoice factoring is an example of the latter. In invoice factoring, a business sells off its receivables (the money owed to it by its customers) to a third party at a discount for cash.

💡 Example: Imagine a small ecommerce business called Matt’s Hats. Matt sells custom printed hats online to bowling clubs in other states. At the end of the year, Matt decides to retire but still hasn't been paid for his deliveries. In this scenario, Matt might sell the invoices from the bowling clubs to a third party, Baxter’s Factors. Baxter pays him 50% of the invoice value upfront, allowing Matt to quickly close out his accounts with suppliers. Baxter later collects the cash from the bowling clubs, and Matt enjoys his retirement sooner.

Depending on the arrangement, the factoring company that buys these invoices has the right to take over collecting them. This could potentially harm customer relationships, so invoice factoring is often seen with companies which have outstanding invoices that are past due and difficult to collect, or companies planning to dissolve

What is Invoice Financing?

Invoice financing is another way to free up working capital  by delaying the financial impact of making payments to suppliers. Unlike factoring, the business does not sell the invoices to a third party. Instead, the business uses the value of the invoices to secure a cash advance or short-term loan.

💡 Example: If Matt decides to stay in business for a few more years instead of retiring, he might choose to get a short-term advance from Nancy Finance, an invoice financing company, using his outstanding invoices as collateral. This allows Matt to pay off his suppliers while waiting for his customers to pay their invoices. Once the customers pay, Matt repays the loan.

What is Invoice Funding?

Invoice Funding helps ecommerce businesses pay invoices without tapping into cash reserves. It involves a capital partner paying the supplier on behalf of the business, and the business repays the capital partner weekly as a portion of its revenues, capped at a certain amount.

💡 Example: Matt’s Hats is still waiting on payments from the bowling clubs but needs to prepare for the football season. He needs to pay his supplier for caps but doesn't have the cash. With Invoice Funding, Matt submits the invoice for the caps to his capital partner, who pays for the caps on his behalf. Matt repays the capital partner weekly from his revenues, maintaining cash flow and supplier relationships.

This strategy not only evens out cash flows, it also allows users to borrow only what is needed, maintain supplier relationships by paying quickly, and maintain customer relationships by keeping invoices in his name. 

Bridging the Gap to Better Cash Flow

Bills coming due before cheques come in leaves businesses in a cash flow crunch, and this is especially true for ecommerce businesses where inventory sometimes needs to be paid for well in advance of a sale. Fortunately, great need gives rise to great opportunity. There are now a number of options for ecommerce businesses looking to bridge these working capital gaps. Consider the various funding options available and how they best relate to your business needs.