How to Use Small Business Loans When Your Invoices Haven’t Been Paid


Are unpaid invoices causing problems for your small business? If so, they don’t have to continue causing problems. In this article, you’ll learn about:

  • the magnitude of the unpaid invoice problem for SMBs
  • what you can do to reduce your number of unpaid invoices
  • what type of financing to get when you have too many unpaid invoices – and not enough working capital
  • three common ways to get working capital
  • two other ways to get short-term financing that are specifically designed for businesses with unpaid invoices

Let’s get started.


As a small business owner, you never want to deal with late payments. But you might be surprised to learn just how problematic unpaid invoices are for small businesses.

Sage surveyed more than 3,000 SMBs across 11 countries to quantify the impact of late payments on entrepreneurs. Here are the results:

  • Over 30% of SMBs are experiencing negative impacts of late payments.
  • 13% of SMB invoices are paid late.
  • Of the late payments, one out of 10 are written off as bad debt.
  • Each year, SMBs spend an average of 15 days chasing late payments.

So, why are so many small business owners dealing with late payments?

In many cases, they fear that customers will be upset if they start a conversation about late payments. There is also the issue of resources – 15 days is a long time to spend chasing late payments.

The good news is that there are ways to reduce the number of late payments that are plaguing your small business – without alienating your customers or using a lot of resources.

How to Prevent Late Payments

Here are a few ways to prevent late payments:

Automate Your Systems

Is it difficult for your customers to make payments? If so, you may be able to reduce unpaid accounts by automating your systems and making it easier for them to process invoices.

Require Upfront Payments

In many cases, small business owners invoice the entire amount for their product or service after it has been delivered to the customer. This can eliminate an incentive for the customer to make the payment in a timely manner. Instead, you may want to invoice half or all of the amount before delivering the product or service.

Add a Due Date

So, you’ve sent an invoice to a customer… but there’s no due date. In that case, the customer is more likely to put the invoice to the side and pay “when they get around to it.” A deadline, on the other hand, can create urgency among your customers – particularly if missing the deadline means paying late fees.

Those are a few ways to prevent late payments, but they won’t completely eliminate late payments, so you need to protect your business from the remaining unpaid invoices.

A Good Working Capital Ratio Protects You from Unpaid Accounts

Your working capital is your current assets minus your current liabilities. Your current assets are defined as anything that can be turned into cash in 12 months including accounts receivable, inventory, and bank accounts. Your current liabilities are your financial obligations that have to be met in the same period of time; a few current liabilities are accounts payable, interest payable, and taxes owed within the next year.

Why do you need working capital?

Your small business needs working capital so it can cover expected and unexpected short-term expenses. A couple of examples of expected costs are your staff salaries and inventory purchases. An unexpected cost would be replacing a piece of machinery that suddenly broke down.

How much working capital do you need?

Your working capital ratio (current assets / current liabilities) is a useful measurement of your working capital position, as it accounts for differences in the sizes of businesses. The ideal working capital ratio is typically somewhere between 1.5 and 2. Your type of business and operating cycle are two factors that impact your ideal working capital ratio.

Your accounts receivable is a component of your working capital. This means that your unpaid invoices – assuming they haven’t been written off – contribute positively to your working capital. That is deceiving, however, as you are unsure if or when the invoices are going to be paid. So, if your small business has a lot of unpaid invoices, you may need a higher working capital ratio.

Three Common Ways to Get Working Capital

Let’s look at three common ways to get working capital for your business, along with the pros and cons that come with each option.

Merchant Cash Advance (MCA)

A merchant cash advance gives a small business owner upfront cash in exchange for a piece of future sales. This small business financing option is different from a traditional business loan, as there typically aren’t fixed repayment terms.

Here’s how a merchant cash advance usually works:

The merchant cash advance company estimates your future sales and determines what percentage of those sales would be necessary to recoup its investment (plus fees) in an acceptable period of time, say three to 12 months.

So, let’s say you borrow $160,000 and you are expected to make an average of $100,000 in credit card sales per month over the next ten months. The merchant cash advance company wants to make back its investment plus $40,000 in fees over those ten months, so it requires that you pay back 20% of your credit card sales (likely $20,000 per month) over each of the next ten months.

That is the gist of how it works, but that isn’t the only way to structure a merchant cash advance – it can get a little more complicated in certain situations.

The pros of a merchant cash advance are that it’s fast and easy to get funding, there are typically low minimum requirements, MCAs are unsecured, and your payment adjusts with your sales. The cons are that there is a high APR, you don’t save any money if you pay back an MCA faster than expected, and you could put your small business at risk if it fails to meet expectations.

Business Credit Card

A business credit card works similarly to a personal credit card, making it a fast way to meet working capital needs.

There are a number of advantages that come with using a business credit card:

  • If you responsibly use your business credit card, it can improve your business’s credit score, just like the savvy use of a personal credit card can increase your personal credit score.
  • You don’t have to predict your future needs. If you take out a term loan, you have to anticipate your future purchases to determine the right number. A business credit card, on the other hand, can be used for the exact amount you need exactly when you need it.
  • You may be able to get a 0% APR introductory period and a cash bonus in the first three months.
  • If you just need additional working capital for a couple of weeks, you will likely be able to use the business credit card without incurring any interest.

The problem with using a business credit card is that you could end up paying a lot of interest if you aren’t careful, as business credit cards often have double-digit APRs. So, you should only use a business credit card if there are favorable terms.

Business Line of Credit

A business line of credit offers some of the same benefits as a business credit card. You only borrow what you need and you only pay interest on the amount that you borrow. There is also a limit on the amount that can be borrowed, similar to a credit card. Another similarity to a business credit card is that you don’t have to commit to how you will use the money.

The advantage of using a business line of credit instead of a business credit card is that you may be able to get a lower APR.

To qualify for a business credit card, you may need a 580+ credit score, 12 months in business, $10,000 in average monthly revenue, collateral, and no recent bad credit events. This means that it could be tough for a startup to get a business line of credit, but most established businesses should be able to meet the minimum requirements.

One thing to look out for is the APR – it is typically variable, not fixed. This means that you could end up paying a higher interest rate than you originally anticipated.

We’ve just gone over three common ways to get working capital. Now, let’s look at two other ways – specifically designed for providing working capital financing for businesses with overdue payments.

Invoice Factoring

Invoice factoring allows small business owners to sell their outstanding invoices at a discount to a factoring company for a lump sum of cash. With invoice factoring, you can fix your cash flow problems, but the downside is that you lose out on a portion of your earned revenue.

Here’s an example that shows how it works:

You have a $20,000 unpaid invoice, but you need the cash immediately, so you go to an invoice factoring company. The company offers to pay you the $20,000 minus a 2% factoring fee (factoring fees are typically between 1% and 5%). So, the discounted amount is $19,600. The invoice factoring company typically pays you 85% of this amount up front ($16,660), collects the invoice when it is due, and pays you the remaining balance ($2.940).

The factoring fee varies based on the customer’s creditworthiness, and whether the factor is recourse or nonrecourse. A recourse factor means that you’re on the hook if the customer doesn’t pay – if that happens, you’d have to replace the unpaid invoice with another one of equal value. A nonrecourse factor would place you under no obligation to replace the unpaid invoice. As you may have guessed, a nonrecourse factor has a higher fee than a recourse factor to compensate the invoice factoring company for the additional risk.

The pros of using invoice factoring to meet your working capital needs are that you can quickly strengthen your cash position, with an easy approval process and no collateral required. One downside is that the factoring fee can be high on an annualized basis, particularly if the invoice is paid a couple of weeks later. Another downside is that there’s no guarantee the invoice factoring company can collect the unpaid invoices, which becomes your problem if you have a recourse factor.

Invoice Financing

Invoice financing is a type of business loan that uses invoices as collateral. Unlike with invoice factoring, you still own the unpaid invoices and remain responsible for collecting the late payments.

Let’s look at an example to illustrate the process:

You have a $50,000 unpaid invoice, and the lender gives you 90% of that amount ($45,000). The company may charge a fee for each week if takes for your customer to pay the invoice, say 2%. So, if the customer takes two weeks to pay the invoice, you owe the lender $47,000 (the 90% advance amount plus fees), and you keep $3,000 of the invoice.

The $2,000 may seem like a small amount in relation to the $50,000 invoice, but it’s a high fee for a two-week period of time. So, a downside of invoice financing is the cost. On the plus side, however, you get fast funding that can alleviate short-term pressures on your business.

Invoice financing makes sense in certain situations, but you should carefully consider the pros and cons to make sure that it’s right for you. You should talk to a Certified Public Accountant (CPA) if you need help assessing your situation.

The Bottom Line

It is typically stressful to deal with unpaid debts, but it isn’t always stressful. Biz2Credit helps entrepreneurs get small business loans that can fix their cash flow problems. For example, Wiggins Cleaning & Carpet Service was struggling to meet payroll obligations as a result of past due invoices. But Biz2Credit was able to provide the business with $27,000 in financing in a timely manner, helping Wiggins meet payroll obligations during that difficult time.

Learn more about how Biz2Credit can help you meet your working capital needs.

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