Reclaiming your business cashflow has never been easier. You can turn a bad invoice into good income with a classic accounting practice called “invoice financing,”
You can call it receivables financing, accounts receivables financing, invoice factoring, or invoice discounting. But, invoice financing is a way of making your receivables earn their way.
How invoice financing turns bad invoices into good income
According to The Economic Times, “Invoice Financing is a form of short-term borrowing which is extended by the bank or a lender to its customers based on unpaid invoices.” One way of looking at it is that you are using the money owed your business as collateral for borrowing ready cash.
An option for many a small and mid-size business, invoice financing helps them meet short-term liquidity needs. Bills owed to a business, unpaid invoices are “accounts receivable.” In business operations, the business expects to receive the money at a later date, hopefully as scheduled.
Many, perhaps the majority of businesses sell their goods and services to customers on credit. For example, hundreds of thousands of businesses sell paint and lumber or plumbing and roofing services on promises to pay. It’s just the nature of those business operations.
- Invoice financing allows businesses use their unpaid invoices to make a short-term loan from a lender that specializes in business lending .That lets the business improve its working capital with cashflow the business can use to pay for company expenses.
- Invoice financing helps lenders because the loan is collateralized by the invoices and because they do not finance the entire invoice amount. Still, the lender does risk some loss if it must pursue collections on unpaid invoices.
- Invoice financing uses factoring and discounting. Factoring pays the borrowing business 70 per cent to 85 per cent of the accounts receivable total. The business will get the remainder when all accounts are paid, net of interest and fees.
When the business opts for factoring, its customers pay their invoices directly to the lender which can confuse and worry the customer. When the business opts for discounting, the customer pays the business which then pays the lender.
When the lender pays the business forward, as it were, on the outstanding receivables, the firm has the cashflow to pay employees, its own suppliers, and/or invest in machinery and growth.
Businesses looking for good income in their bad invoices
It’s the way of some businesses to incur many receivables, some of which sit on the business books for some time. As Jared Hecht wrote for Huffington Post, “You’ve done great work for a client, but they’re dragging their feet when it comes time to pay. You’re out the cash you need… And payroll is coming up. Or you need capital to finance your next project. Or—well, it doesn’t really matter. You need money, and waiting on those tardy customers is hurting your business’s cash flow.”
- Printing: Printers extend credit regularly. Their best customers pay on 60 or 90 day scheduled but not on delivery. The invoice financing lender likes these credit-worthy customers, but it does not qualify your business clients.
- Contractors: General contractors, house painters, landscaping providers, all such businesses work off credit agreements. After all, they are waiting on payment, too.
Your business may be at the top or bottom of the construction service chain, but you can continue to run your business with cash flow from invoice financing.
- Professional service providers: Professionals — medical practitioners, architects, attorneys, consultants, and more — work on long-term deals. They don’t have the time to wait for payments or to chase delinquencies. And, Invoice Financing allows the professional to protect is client confidentiality.
- Hauling: Logistics providers work somewhat unevenly. Hiring drivers can require cash payment which leaves your business cash poor for the short-term. But, invoice financing lets your logistics operation work more quickly and flexibly.
- Manufacturing: A manufacturer will have continuing cycles of equipment repair and maintenance. Without flexible budgeting, manufacturers risk payroll shortfall, for instance. But, invoice financing can help.
- Recruiting: Firms that recruit workers and/or place temporary employees must wait on payment. That gap between service and payment is the way the businesses run. Without adequate planning, this process keeps the business at the financial edge of success and failure. But, invoice financing can stabilize your cashflow well enough to plant better.
- Transportation: Independent transportation providers, from Uber drivers to short-haul deliveries, have unsteady costs for fuel, vehicle maintenance, and payroll. Invoice financing can modulate the sporadic income and outlay.
Countless business styles and models have cashflow issues related to their receivables pattern. More businesses do than don’t. But, being able to protect their stability and liquidity are issues they must master. Invoice financing is a fast and cost-effective way to do that.
Reclaiming your cashflow
Invoice financing is one way for a business to borrow money. And, given the risk of borrowing, businesses can count on the advantages of invoice financing.
- Cashflow now: Traditional business loans takes time, paperwork, and processing. Approvals can take weeks and credit checks. But, with online invoice financing, your business can reclaim cashflow quickly and easily in only 5-minutes or so.
- Avoid Business Debt: Invoice financing is a form of debt-free financing. Your cashflow improves, but you don’t increase your business debt because the receivables are listed as assets. That’s why it is easier to get the funding.
- No Cashflow Control: Lenders providing invoice financing do not govern how you spend the money. Of course, business owners should operate, spend and invest prudently, but the lender does not seek approval of expenditures.
Invoice financing helps business owners to free cash locked up in as yet unpaid receivables.
- Flexibility: Customers may owe businesses tens to hundreds of thousands of dollars on a regular or revolving basis. That consistent or inconsistent debt is an “asset” only on the books.
And, there are several financing options available. But, if short-term liquidity or cashflow is the issue, invoice financing is a go-to choice.
Although used synonymously, invoice financing, invoice factoring, and invoice discounting are different devices, so you may want to check with your account on the most prudent action at the time.
Considering your options
- Line of Credit: A lender may offer a line of credit on the business’s record as a customer, a credit appraisal, and other factors. A line of credit works like a credit card. Your business uses up the set line of credit as needed paying interest on the funds used. A line of credit works well for a predictable obligation. Some accountants recommend combining a line of credit with invoice financing to form a flexible cushion for cashflow worries.
- Term Loan: Banks and other lenders offer term loans at favorable to reasonable rates. But, lenders take their time and will decline applications. Approved loans will provide a lump sum in cash for capital expenditures, facility expansion, or more. Combined with invoice financing, you have the liquidity to cover utility bills, advertising campaign, or payroll.
- Personal Loan: Because personal loans have lower interest rates than business loans, some business owners will opt for the personal loan even though it’s not smart to mix your personal and business finances. You can still use invoice financing to reclaim your cashflow.
- Equipment Financing: When you make a capital investment in durable equipment, for example, the vendor will offer lending options. Businesses typically finance heavy investment in technology, manufacturing, engineering, or other high-cost equipment with the help of the vendor. Combining that with invoice financing allows the cashflow necessary for regular payments and short-term cash needs.
Reclaiming your cashflow has never been easier in Australia
A flexible, experienced, and understanding lender will help you find the most practical and sensible solution for your business needs.
- Single or Spot Invoice Finance is the most popular choice for invoice financing. You seek to fund the cashflow using one invoice or a batch of invoices.
- Partial Ledger Invoice Finance lets the business select profitable customers and skip the customers who pay quickly.
- All of Turnover Invoice Finance uses the full value of the outstanding invoices to secure as much cash as possible.
What does invoice financing cost?A number of different factors determine the cost of an invoice finance facility: creditworthiness, industry sector, time in business, type of business, total invoice value, and type of invoice finance device — spot, partial ledger, all of turnover.
You will pay a small factoring fee on each invoice. This is a small percentage of the invoice deducted by the lender once the invoice is paid in full by your customer. The lender then pays the balance of the paid invoice back to you.
Is it worth the cost?
Over sixty per cent of independent businesses have invoices over two months old. The great majority of those invoices will get paid, especially by customers that are businesses themselves. It’s a continuing cycle of trust that provides a backbone for the business economy.
Because the invoices represent their own collateral, invoice financing is a low stress, fear-free way to effectively finance your business cashflow shortfall.