Invoice Financing for SaaS Companies: What Is It & How Does It Work?

It is no secret that in order to grow a SaaS company, business leaders need to consider cash flow. A poor cash flow means limited capital for creating growth opportunities. It can also threaten a small business’s ability to keep up with everyday operations. 

Invoice financing is an excellent option for SaaS companies looking for a fast and easy way to earn a short-term type of funding. With this type of financing, invoices serve as collateral rather than your own assets.That means 0 borrowed money like with traditional loans. 

Keep reading to learn more about invoice financing, how it works, and the benefits it serves for SaaS companies.

What is Invoice Financing? 

Invoice financingis a form of loan that allows organizations to borrow money against outstanding invoices from customers and clients. Perhaps you’re more familiar with the terms receivables financing or invoice trading as they are synonymous with invoice financing. 

Unlike traditional small business loans, customer invoices serve as collateral on the capital you borrow. As a result, many companies find that invoice financing is easier to qualify for because it is not dependent on credit score or other lending minimum requirements. 

Invoice financing is an attractive funding option for B2B and service-based businesses. Unfortunately, these organizations are more susceptible to cash flow problems because they depend on customers to pay invoices on time. However, companies that rely on invoice trading are paid almost immediately instead of the 30, 60, 90-day payment cycle.

Pro Tip: Check out Crowdz! They offer an intuitive marketplace that fast-tracks invoice payments and quickly increases cash flow for SaaS companies.

How Does Invoice Financing Work?

Invoice factoring is the most accessible form of financing. It often takes place in three stages. 

• Stage #1: Company ABC sells their invoice on a financing marketplace such as Crowdz. 
• Stage #2: Company ABC receives around 85% of its total invoice due from investors. 
• Stage #3: Once the customer of ABC pays its invoice in its entirety, the lender returns the remaining 15% minus any fees. 

Let’s use an example with actual figures to make the process of invoice financing more clear.

Company ABC has receivables of $10,000, which are due in 60 days. However, the business needs this money more quickly to effectively grow its operations and pay its employees. As a result, Company ABC works with an invoice financing company to receive the money immediately rather than 60 days. 

The invoice factoring company reviews the payment history of Company ABC’s customer. After verifying the customer’s creditworthiness, the invoice is sold to an investor. The investor lends Company ABC 80% of the invoice or $8,000. 

In 60-days, the customer pays the investor the full $10,000. Once this transaction is complete, the investor returns the remaining 20% and deducts a fee of $200. So overall, Company ABC got to quickly fund its working capital without waiting for customers to pay the money back in 60-days.