Unpaid invoices remain one of the major hindering factors to growth, particularly amongst small business owners. In fact, if all late invoices were to be paid at once, small and medium startups would see an overnight increase to their business finance of $31k and would be able to jointly hire an extra 2.1 million employees.
Inadequate cash flow may adversely affect the viability of your business. In a study conducted by US banks, a more significant percentage of businesses fail as a result of reduced cash flow than anything else. Unfortunately, if you are unable to receive all your payment at once or prevent the lateness altogether, you are placing your business in difficult waters.
However, these three solutions could help you with cash flow issues and help get the delayed invoice payments coming in earlier: invoice financing, factoring and discounting. We explain them in more detail below.
Commonly referred to as ‘Accounts Receivable’ financing, invoice financing refers to the method through which a business can improve cash flow through the selling of invoices during challenging credit situations.
This type of finance utilises invoices as a means for businesses to unlock their tied-up cash, thereby speeding up the process of cash flow. Businesses sell invoices to third parties who then advance funds to the business in exchange for the value of the invoice.
Securing invoice financing is a very simple process—you only need to follow the steps below:
- Select the receivables you wish to finance
- Through an invoice financing company, apply for funding
- The lender will then advance you the face value of the invoice, which usually ranges from 80% to 90%
- You can then use the funds to pay for your business expenses. The lender will charge you a weekly or monthly fee until you pay back the invoice.
- Your customer finally pays the lender for the invoice. The lender deducts the fees and advances the remaining amount to you.
The Eligibility Requirements for Invoice Financing
In order to be eligible for Account Receivable financing, the following requirements must be met:
- Your business must have been operating for at least six months
- You must be B2B business that invoices customers
- Have an annual revenue of $50,000 or more
- Have creditworthy customers
- Have outstanding receivables
When you apply for invoice financing, there are key documents that you will be expected to submit including your driving licence, outstanding invoices, voided business cheque, and bank statements.
Invoice factoring refers to a type of financing which releases cash that is tied up in outstanding invoices. This financing option is ideal for business that wants to improve their cash flow, fund expansion plans, and collect customer payments. Rather than waiting for a customer to pay, one is permitted to borrow against the amount they are owed.
How Invoice Factoring Works
Invoice factoring is a very simple concept. When a company has one or more invoices that are due, but have not been paid yet by the clients, this financing method enables businesses to sell their invoices to factors (lenders) for the sum of the total outstanding balances. You can only borrow against the amount in your outstanding invoice since the factor provides the cash instead of the client. Thus, this process creates more financial flexibility without any stressful loan application process to go through.
The factor (lender) holds onto your invoices in exchange for a percentage of the value of the total invoices. The factor is also responsible for the process of invoice collection, typically working directly with the client. Once the client pays the factor, you will be able to receive the remainder of the balance after all the deductibles.
5 Ways to Use Invoice Factoring
Below are some of the examples of how businesses can use the funds they obtain from invoice factoring:
- Bridging the cash flow gap
The most stressful issue with unpaid invoices is the cash flow uncertainty. Although you know you are expecting some money, you are not sure when the money will come in. Invoice factoring protects you from the guesswork and makes the payment process much easier with a steady flow.
Through invoice factoring, you are able to plan your business activities whilst also minimising fluctuations.
- Easily accessing short-term funding
Invoice factoring not only ensures you have a steady cash flow but also helps you to pay bigger expenses such as emergency repairs or payroll. Rather than panicking due to inadequate operational cash, you are able to use the invoice factoring to take care of such needs.
Invoice factoring is a quicker business line of credit and a speedier means of obtaining a business loan.
- Accessing working capital by use of invoice factoring
Your company’s operational budgeting or cash flow may be perfectly fine over a period of time. But even so, there may be times when you need to have a lump sum more quickly than the terms of your invoice. In such a case, invoice factoring may help speed things up; the process will help you increase the amout of liquid funds your business can possess.
This financing option is similar to invoice factoring, except that the invoice seller remains completely liable for the debt. As such, it is most commonly applied by larger business with greater resources or in a case where a company is dealing with debt collection.
How Invoice Discounting works
Here are the steps to follow when you want to access funds using invoice discounting:
- First, you provide goods or a service to your customers and send them an invoice
- You then send the invoice details to the finance provider
- Funds will be made available to a certain percentage of the invoice’s face value.
- The invoice finance provider conducts the invoice collection procedure
- Once the client pays, the invoice balance is credited to your account
Invoice financing, invoice factoring, and invoice discounting are the main options you can consider to get the cash flow running in your business. They are quick and easy funding options, which means that you will not need heavy paperwork or a lot of time to process the funds. Furthermore, these options do not have hidden costs that would hinder profit discovery.