Invoice financing is a fast, debt-free alternative to traditional financing options for your small business.
Cash flow is the lifeline of every business. As a small business owner, you understand, just how lifesaving quick access to cash is for your business; especially, if you have lumpy cashflow, seasonal business, or long invoice cycle.
With healthy cash flow, you can quickly take advantage of unexpected business opportunities. You can ramp up marketing which leads to more sales, revenue, and growth.
You also get to pay business expenses like payroll and utility bills without falling behind.
Unfortunately, as you know, financing your businesses often comes with lots of risks.
And, if for whatever reason, you make the mistake of going for the wrong financing option, you could end up hurting the company a few years down the road.
Here’s where invoice financing comes in.
What is Invoice Financing?
Invoice financing is a simple, debt-free way for businesses to improve their cash flow by turning unpaid invoice into cash.
Imagine this, you’re a business owner, you just delivered a service or product to a customer. You then, issue an invoice to the customer.
But, the payment term is that the invoice is payable say, in 30 days time. However, you need the cash to take on more order. Or pay your staff. Or meet any other obligations.
With Invoice financing, often called invoice factoring, or account receivable financing, you can sell the invoice to raise cash immediately.
How does Invoice financing work?
To illustrate how invoice financing works, take a moment to imagine this:
You, a business owner, or seller, or vendor – delivers an order; could be services or products to a customer.
Let’s also assume, you have an agreement with this customer that they’d pay for the products supplied after a given period – say, 30 days.
So, you sent the order with the invoice to the customer. And, begin to wait for the 30 days payment term to receive your money.
In the meantime, you need cash to sort our payroll expense or pay for utilities, or any other business obligations.
Using invoice financing, you can raise cash pretty quickly to offset your expenses while waiting for the due date of the invoice to be paid.
All you have to do is, sell the invoice to a financier, who pays you in cash between 70-80 percent of the invoice’s face value.
Then, once the customer pays the complete amount for order the financier deducts the 70-80 percent cash they sent you earlier plus a specified fee. And, you get the rest.
Invoice financing is a win-win-win situation for all parties involved. The customer gets a favorable payment term. You get cash flow to engage in your business. The financier gets a little fee for their troubles. And everyone is happy.
Other Benefits of Invoice Financing
Opting for invoice financing, however, comes with lots of benefits.
These benefits are unique and are not associated with the benefits derived from other financing options.
Enjoy the Privileges of Instant Cash Flow
Following the traditional loan route, requires a business to gather up every paperwork that is connected in one way or the other to the finances of the company.
The business will also be required to fix an appointment with and meet a bank representative, fill out application forms, etc. to secure financing.
The approval process of traditional loans can take anything from a few weeks to months, and businesses that choose to follow this route have no choice than to wait for the funds to be made available by the bank. And, that is if the loan application has passed muster and is approved.
But this is not the case when you opt for invoice financing. Businesses that choose to go this way will begin to receive offers for their receivables within a short while after completing their application as well as the invoice uploading process.
As soon as a business accepts an offer for their receivables, the funds will be transferred immediately, and they can access it within two business days.
The lack of wait time that is needed for both approval and the transfer of funds make invoice financing a much better option than traditional financing.
No Restrictions On What You Can Do With The cash
Most of the time, when a business applies for a loan at a bank or traditional lender, the former or latter will inquire the reason for the cash before they consider approving the loan application.
This means that any money obtained via these traditional means must be used for the purpose that was stated in the forms submitted to the bank or lender in accordance with the loan agreement.
But that is not the case with invoice financing: it does not limit any business and therefore, has nothing to do with what an establishment chooses to spend its fund on.
If an opportunity that promises to be lucrative shows up unexpectedly, the company is free to use the funds obtained via invoice financing to quickly take advantage of the opportunity as soon as possible.
You’re Not Taking Any New Debts
Invoice financing has to do with a business getting access to cash for money that is owed to the organization. This is why it is considered a form of debt-free financing.
A business can readily tap into assets that it has to obtain the cash they require as against increasing the overall debt of the organization whenever they want to secure financing for expanding the business or to complete special projects.
The primary reason why it is easier for a business to secure this type of financing is that the company makes use of assets contained within its receivables account when they decide to opt for invoice financing.
Increase in Efforts for Collection
Invoice financing, when performed through a reliable factoring company, will allow the company to make attempts at collecting receivables.
Any business that chooses to follow this route will have the additional benefit of hiring the services of a professional collection agency without necessarily paying a collection agency fee.
Factoring companies are always interested in the money that is recovered in connection to accounts receivable, and so the company will then act as a collector. They will go ahead and get in touch with customers or clients to request prompt payment.
Businesses can save a lot of money when they use invoice financing since there will be no need for them to employ a dedicated collections specialist. It will also minimize the time it will take attempting to settle the credit accounts of customers.
Any establishment that is ready to take advantage of the benefits of invoice financing, should, therefore, ensure that they connect with a reliable factoring company.