Invoice Financing: What Is It and What Are the Benefits?

It’s no secret that all small businesses have to work hard to manage cash flow to make sure that all invoices get paid on time, payroll is made each month, and operational and maintenance costs are covered. While the cash flow challenges are not wholly unique to cannabis business owners, cannabis business owners do face other unique challenges in financing their businesses. As a result of federal regulations that limit the opportunities for banks, credit unions, and credit card companies to finance cannabis businesses, these businesses operate on a primarily cash basis. With no available line of credit to cover cash flow gaps, cannabis business owners can’t make their payments without cash physically on hand to pay their bills. If their invoices don’t get paid on time, cannabis business owners can experience working capital strains and limited business growth as a result. Invoice financing offers a viable opportunity for business owners looking to prevent cash flow interruptions.

What Challenges Do Cannabis Business Owners Face When Seeking Financing?

Although recreational cannabis use is legal in 11 states and medical cannabis use is legal in 33 states, cannabis business owners still deal with serious roadblocks when it comes to obtaining financing, no matter how legal their product might be in their state. Cannabis remains Schedule I controlled substance at the federal level (making it illegal), which means that getting financing through a traditional financial institution, such as a bank or credit union, is nearly impossible. Due to regulations surrounding illegal substances, federally insured financial institutions cannot legally handle capital that is connected to cannabis. That means that if you’re a cannabis business owner heading to your local bank or credit union, you’ll not only be denied the ability to apply for a loan, some credit unions in legal states such as Colorado, CA, WA, etc. do actively bring on cannabis operators so I’m not sure if you want to mention that or just not be so adamant about the fact it’s not an option. They usually don’t provide lending services so these are not competitors to Bespoke but usually are partners.  . Banks and credit unions are subject to the same regulations around money laundering that individuals are, so these institutions also cannot provide real estate or equipment loans, among other things, to cannabis businesses; any money tied even tangentially to cannabis is off-limits. All banks are also subject to a regulation called the Bank Secrecy Act that requires banks to flag transactions of 5,000 dollars or more that may be associated with illegal activity, including cannabis sales. Because cannabis businesses conduct their operations in cash (as credit cards cannot be used due to the aforementioned laws), cannabis business owners have no place to store their cash, meaning they have to take additional precautions for storage while still keeping enough cash on hand to pay bills. It’s surprisingly complicated! Fortunately, commercial lenders specializing in cannabis business loans, such as Bespoke Financial, have stepped up to fill the funding gap facing cannabis business owners, so funding availability is increasing.

What Is Invoice Financing?

Invoice financing is a financing solution that provides a way for businesses to borrow money against the amounts they are owed from customers through their accounts receivable. This method of financing recognizes that most businesses sell goods or services to large customers like wholesalers or retailers on terms such as NET30, meaning that invoicing is not completed at the same time as goods are delivered. When a company purchases goods or services from a business, it receives an invoice describing the total order, the amount owed, and the due date. This sentence seems repetitive and therefore more confusing…I would removeThere are two ways that invoice financing is usually structured, including factoring and discounting. Under invoice factoring, a lender advances 75 percentt of the total value of the invoice upfront. Upon receipt of full payment, the lender then pays the remaining 30 percent of the invoice to the business owner, minus fees. Under invoice factoring, the lender collects money directly from the purchasing business. With invoice discounting, the business owner is responsible for collecting payments from their customers. Under this arrangement, the lender advances a set percentage of the invoice amount to the business owner. Upon payment of the invoice, the business owner pays the lender, minus a fee or interest. Because cannabis business owners typically experience such a long lead time on open invoices, invoice financing is a particularly useful tool; invoice financing is a type of business financing that allows businesses to cover expenses and reinvest in operations and growth costs without worrying about cash flow.

What Are the Steps of Invoice Financing?

There are four main steps in invoice financing. The example below reflects the process of invoice factoring:

  1. First, a cannabis business ownerships a product and issues an invoice for goods and services. The invoice specifies a due date and the business owner requests invoice financing from the lender.
  2. Next, a percentage of the invoice amount (approximately 75percent) is deposited directly into the cannabis business owner’s account by the lender.
  3. The cannabis business owner uses the funds to increase production and profits or pay marketing or other costs. Financing fees accrue during this time until the invoice is paid in full to the lender.
  4. The invoice is paid in full to the lender, who remits the remaining 25 percent payment to the cannabis business owner minus accrued fees.

Under the terms of invoice financing, the cannabis business owner receives payment directly from the lender and interest only accrues when the funds are used. Repayment terms are generally about 90 days in length, and fees are approximately 2.5 to 3.5 percent of the invoice amount and are assessed every 30 days. 

What Are the Benefits of Invoice Financing for Business Owners?

As previously mentioned, invoice financing offers an excellent opportunity for cannabis business owners looking to manage cash flow. This type of financing offers quick access to working capital as a cash advance, with funds typically received within two business days. A quick turnaround for financing means that you’ll be able to meet your operating and maintenance costs, order new inventory,  and grow your business. Invoice financing provides consistent cash flow, helping business owners focus on what’s important – growth – rather than worrying about daily balances. When managing payment timelines for cash flow purposes is taken out of the equation, many cannabis business owners also find that they are able to extend more flexible payment terms to their customers, helping to improve business relationships and possibly save money. Invoice financing is also flexible, so you’ll only accrue interest when you’re actually using the funds, helping to save money.

What Are the Benefits of Invoice Financing for Lenders?

Invoice financing isn’t just beneficial for business owners. Lenders also like invoice financing because the invoices serve as collateral for this type of financing, unlike lines of credit or credit cards, which are often unsecured. Because the lender typically does not advance 100 percent of the invoice amount, the risk is also limited, since it is assumed that the business owner wants to collect the remainder of their money once the invoice is paid. Thus, invoice financing is a form of financing that can be extended to borrowers whose credit may not be perfect or who may not have other collateral to offer.

Who Should Consider Invoice Financing?

Invoice financing can be beneficial for cannabis business owners operating in nearly every aspect of the cannabis industry, but it is especially recommended for cultivators, distributors, manufacturers, cannabis brands, and ancillary companies. Invoice financing can also be appropriate for some other components of the cannabis industry under the right set of circumstances. 

Where Can I Get Invoice Financing?

Cannabis business owners might be prohibited from working with traditional financial institutions, but commercial lenders like Bespoke Financial have been created specifically to address the needs of the growing cannabis business community. One benefit of working with a cannabis-specific lender is that these lenders understand the financing challenges faced by the industry and are likely to offer industry-appropriate financing options, including invoice financing. They also won’t be scared off by what remains a risky industry due to the legal grey area surrounding cannabis businesses. When speaking with lenders, be sure to explain your financing needs and ask for guidance in choosing the loan product that is right for you.

What Do I Need to Apply for Invoice Financing?

While the application process differs depending on the lender, here are some general tips. Before you apply for any type of financing for your cannabis business, including invoice financing, get your financial “house” in order by gathering your personal credit report (and the credit reports of your business partners), three to six months’ worth of bank statements, balance sheets, income statements with your annual revenue, and your capital needs. You and your business partners also need to be aware of your creditworthiness, have a history of making your payments on time, and have no bankruptcies on your record. Many lenders will also require a clean criminal history for all business partners and management personnel due to the risky nature of the cannabis industry.  Some lenders may also want to review a list of your key management personnel and a list of all active cannabis licenses held. Keep in mind any service fees or processing fees that apply, high interest rates, and any potential hidden fees as well when considering a factoring company. 

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