There are two main ways invoice financing is structured. Either way, revenue earned can be unlocked almost immediately, without businesses having to wait the full term of the invoice to re-invest those funds.
Through an invoice factoring model, finance providers effectively ‘buy’ the invoices from the business, and collect payment from the customer directly.
Providers will typically pay a percentage of the total invoice value upfront (typically 70% to 85%). They will pay the rest of the value, minus a pre-agreed fee, when all invoices are paid.
Through invoice discounting, the finance provider pays a larger percentage of the invoices upfront – up to 95% – but the business remains responsible for collecting invoice payments.
The business repays the lender as invoices are paid, minus a percentage fee.
This way can end up being slightly more expensive, but businesses don’t have to make customers aware of the loan arrangement.
Imagine a hypothetical software development startup dedicated to creating AI solutions for small businesses – it’s growing, and taking on larger and larger projects. But its 90-day invoice payment terms mean the founders can’t hire at the speed they would like to, to capitalise on momentum.
The business has issued an invoice for $100,000, following completion of a large project.
An invoice financing provider offers an 80% advance, and takes on ownership of the invoice entirely. The remaining 20%, minus fees, is to be paid when the invoice is paid.
The fee on the loan is 3% of the total invoice amount, so the business receives $80,000 upfront, and another $17,000 after payment.
The founders use that $80,000 to hire two new developers, allowing them to take on two new $100,000 projects, much more quickly than they would otherwise have been able to.
What can Tractor offer?
Tractor Ventures doesn’t (yet) have a specific invoice financing offering. However, our non-dilutive debt funding is intended to be flexible and transparent, and to work around the needs of individual businesses.
Debt funding provides another option for seed- to Series A-stage startups to achieve short-term growth, without having to sell equity.
Loans are repaid based on revenue, so if you do have payments on the horizon, our team will take that into account.
Contact us today to discuss your business’ needs, and how we can help maintain your momentum.
Or apply here to set up your profile and access an automated assessment – you can connect your accounting system to ours, so we can let you know where you stand ASAP.
Next, take a look at our Tractor Business Loan Calculator
View our Business Loan Repayment Calculator
Find out more about Tractor's non-dilutive lending solutions
We'd love to chat and see whether Tractor is the best partner for you.
Apply Now
Sign up for our newsletter
