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 financing is 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.
What are the Benefits of Invoice Financing for SaaS Companies?
As a SaaS company, your business model revolves around selling a service. In some or perhaps most scenarios, the transaction is done on credit. In other words, clients don't pay immediately for their purchased services.
The customer is given an invoice with the payment plan, including the total amount due and the payment's due date. While this is common practice for most B2B and SaaS agencies, delayed payments often result in cash flow challenges. Your company is left with tied up funds that should be used to invest or grow operations.
As a result, many SaaS businesses choose to finance their invoices. The benefits of doing so include:
- Access to immediate funds to reinvest in operations and growth
- Improved working capital
- Only pay back investors once money comes back in
- Determine how much money you need – and how often
- Easier time taking on new customers because of the influx in cash
- Easier time paying employees and suppliers
Improve Your Cash Flow with Crowdz
Baremetrics is partnering with Crowdz, a competitive invoice auction that provides SaaS companies with instant working capital and trade finance resources. The Crowdz Marketplace gives your accounting and finance teams the edge they need to put more money on the books.
All invoices are welcome on their marketplace because they understand every dollar counts. Plus, you're able to access cash on the spot as the Crowdz financing platform lets you select which receivables to advance based on your needs.
In addition to the Crowdz Marketplace, they also recently launched Recurring Revenue! Here, users are connected with investors who provide capital in return for their ongoing total gross revenue. In other words, companies can advertise invoices and contracts of clients subscribed to their services.
Learn more about The Ultimate Funding Solution: Crowdz Recurring Revenue Financing.