The success of your business comes down to one thing – money.
And when your customers don’t pay their bills, you can find yourself in a cash crunch. The success of your business and your ability to grow is greatly dependent on your access to working capital.
It can be difficult to secure a loan from a bank when you’re in this type of situation. So what can you do?
Keep reading to learn more about how invoice financing can boost your cash flow and help your business grow.
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Consequences of Restricted Cashflow
Businesses with longer operating cycles are more likely to experience restricted cashflow. This is because they are often waiting on customers to pay their overdue invoices.
This can make it difficult, if not impossible to maintain a steady flow of cash. When you don’t have enough cash you can’t afford many of the basic things your business needs. These might include:
- Paying your bills
- Hiring staff
- Purchasing inventory
- Coping with seasonal lows
- Paying off outstanding dues
- Availing large orders
Without working capital, your business can’t function. And it certainly can’t grow.
If you find yourself in a situation where your money is tied up in unpaid invoices, there’s a solution for you. Traditional loans are often hard to come by for small businesses. Fortunately, alternative lending options have become common and are designed for businesses stuck in lengthy operating cycles.
Invoice-based financing can get money in your hands quickly and doesn’t come with the downsides that traditional loans carry.
What is Invoice Financing?
Invoice financing works by allowing businesses to borrow money from invoice financing companies against the amount they are owed by customers via unpaid invoices. In exchange for the cash up front, businesses pay a small percentage of the invoice amount to the invoice financing company. Other names for invoice financing include accounts receivable financing and receivables financing.
Most businesses that sell goods and services to other companies do so on credit rather than requiring customers to pay upfront for those goods and services. The purchasing company is then sent an invoice for the amount owed and the date this payment is due.
The problem here is that it can take a while for customers to pay. This ties up money that your business could be using for other essential business functions or to reinvest in the business itself.
Businesses can finance these invoices when they have slow-paying accounts receivable.
What is Invoice Factoring?
Invoice factoring is a form of invoice financing where a company essentially sells its accounts receivable, or unpaid invoices to an invoice financing company.
With general invoice financing, businesses can borrow a set amount or open a revolving line of credit based on the amount they are expected to recoup through customers paying their invoices. The outstanding invoices serve as collateral for the loan. Instead of evaluating the credit of the borrowing business, invoice financing companies look at the risk of the company that is going to pay the invoice.
Ultimately, the responsibility of collecting the unpaid amounts still falls on the business that is borrowing money from the lender.
With factoring, an invoice financing company purchases the unpaid invoices and takes over the responsibility of collecting on them. Your business can get working capital in your hands right away and not have to worry about paying back the lender.
Benefits of Invoice Financing
Invoice financing is a great alternative to traditional loans for small businesses. Let’s take a look at some of the biggest benefits of invoice financing and invoice factoring.
Invoice financing is a great alternative to traditional lending methods because it doesn’t require stellar credit or additional assets. Your outstanding accounts receivable act as your collateral and your primary qualification for approval.
This makes invoice financing an option for most B2B and B2G companies. Applying for invoice-based financing is easy and doesn’t take long periods of time.
Along with an easy application process, invoice-based financing doesn’t take long to approve. This means you can get cash in your hands in as little as 24 hours. For businesses that need working capital right away, this convenience can be invaluable.
With invoice financing, you don’t have to make fixed payments on the amount you borrow. Instead, you only make payments when you receive payments from your customers.
This means your cashflow won’t be affected by repaying your lender. When you choose invoice factoring, you don’t even have to worry about collecting on your unpaid invoices because the lender takes on that burden.
No Debt Accumulation
Perhaps the biggest benefit of using invoice financing to improve cash flow is that your business won’t be taking on any debt. With invoice factoring, you won’t increase your debt at all, unlike with traditional loans.