From a small seed you’ve grown your business. It isn’t just your work; it’s part of who you are, and you want the best for your start-up. One of the biggest problems for small businesses is late payments on invoices that clog up the cash flow and make financing and upward mobility difficult for your business.
This is especially true if your business has high yield seasons in the year. You need those payments to come in on time. But you can’t always get people to pay their invoices at the speed that you need.
One of the best options out there now for fixing this problem is called invoice financing.And it’s easier than you’d think to use.
What is invoice financing?
As a business owner, you know that invoices can be outstanding from 30, 60 to even 90 days before people pay their bills.That’s a really long time to have your cash flow held up. Without those funds coming in, you can get behind on payroll or being able to reorder supplies.
However, invoice financing saves the day in such situations.
This term is actually interchangeable with a few others out there, such as “accounts receivable financing” and also “factoring.” All these terms basically mean solutions to turn unpaid invoices into available funds for your business. In order for invoice financing to happen you need three parties involved: the company who needs cash flow, the customer who has not yet paid his or her invoices and the financing company who has the clash flow.
This party is often referred to as the factor in this scenario.Banks view invoice finances as a legitimate, positive funding option and alternative lenders can provide all kinds of flexible terms that work with your needs. There are a lot of varying terms and conditions with invoice financing, so it is best to get familiar with it through a highly reputable lender.
How does it work?
It all sounds ideal, but you might have questions about invoice financing actually breaks down into manageable steps.
- Let’s take a look.
- Your business issues its customer an invoice for the product or service you have
- Your business can sell the invoice to a financer for faster payment, for a small transactional fee.
- Rates can vary depending on the application. To learn more, check out the express invoice financing rates.
- Your business will receive about 85% of the amount from the total value of the invoice.
- The business then has the cash flow it instantly needs.
- The option allows the business to order more supplies, put the cash toward deeper and wider marketing strategies or simply pay employees on time.
- The financer then works directly with the customer to have it pay the face value of the outstanding debt.
The business owner will then receive a rebate for the remainder of the funds, minus a fee that will be based on the terms of and value amount of the original invoice.
In this way, invoice financing is not a loan.
But rather, you sell your invoice sat a discount to a financing company in exchange for a lump sum of cash.The factoring company now owns the invoice. It is theirs to pursue remittance, in 30 to 90 days.As you can see, the how of invoice financing is basically also the why! It’s quite a simple and stream-lined financing option where all parties get what they need.
Your business gets paid on time the cash flow it needs to stay afloat, the financier collects a fee for his work and the customer pays only the original amount from the invoice.
Why it Might be Right for You?
In the early years, invoice financing was only used by companies in construction or medical services, transportation, staffing, wholesale trade and manufacturing. But with so many online startups, invoice financing is a widely-used option for cash flow. It is much more common in a whole range of fields.
There are thousands of online startups in Information Technology and Public Relations that have discovered the solid benefits of invoice financing. If your B2B has jammed cash flow or if it has a long payment cycle, then invoice financing is really great option that will keep you sane and in good working order.
But if your business does not use invoicing, it isn’t an option.If your business also does payment upon delivery, then invoice financing isn’t right for your company. If your business has great costumer care and service, you may wonder what your loyal customers will think about you using invoice financing. The truth is, most financiers or “factoring” companies will verify all invoices before purchasing them.
This means that they’ll double check that the service or product was acceptable to the customer.Customers will be contacted directly by the factoring company, and a great factoring company has friendly, well-trained staff who aren’t going to try and hustle customers.
They want customers to pay their invoices, and they know that customer loyalty is important.It is necessary that all the involved parties be satisfied with either cash flow terms or product and service.It is important for this quality check to happen before a factoring company takes ownership of the invoice.
The Final Verdict
Invoice financing may not be right for every company, but if the term, “working capital loan” gets your hackles up, invoice financing is a fantastic way to keep your customers paying their bills and to provide the cash flow you need to stay on everyone’s radar as a number-one small to mid-sized business.
There are very few rinks involved and there are certainly great factoring companies out there who make it their goal to please both the business and the customer with care, attention and cash flow. Every business struggles with cash flow and that is nothing new to the diaspora of entrepreneurs.But businesses that process invoice struggle with it most. This is when invoice financing saves the day.