Estimated reading time: 8 mins
If you’re a business owner who’s doing business with government agencies or other businesses, you have plenty of reasons to consider invoice financing, some of which we’ll go over today. As you can probably tell, waiting around to get paid is not exactly the most enjoyable thing you can be doing, and invoice financing is an effective solution for that. But before we get to the nitty and gritty, let’s examine the term a little more in-depth.
First things first – what is invoice financing?
Has it ever happened to you that you had to wait for months on end before the client finally decided to pay the bill? You’re not alone. Even though you’ve earned the cash in every right, in situations like these, you still end up not having it at hand during this period of time, which could force you to pass up on several lucrative opportunities due to not having enough financial resources. Just think about what this sort of stagnation could cost you; you could be expanding your business, investing in new equipment…
Invoice financing (also referred to as “factoring”) was designed to address that problem. In essence, it allows you to convert the unpaid invoices you’ve issued into cash. Don’t worry, we’ll explain how all of this works in a brief moment.
The details explained
In case you’re dealing with customers who are delaying the payment for too long, you have the option of selling the invoice to the financier who gets ownership of it. That way, you receive an advance, which is money that becomes available to you immediately, so you can manage it as you please. The downside, however, is that you’re only going to be able to receive about 70 – 85% of the full value stated on the original invoice (the financier is going to take a cut – that’s how they get paid for their services).
Still, if a client who’s unwilling to make a payment has you backed into a corner, it may be a feasible route to take. By doing so, you will be able to pay your own dues (like your employees’ salaries) and jump onto any business opportunities as soon as they present themselves.
Who is invoice financing meant for?
Traditionally, construction companies, healthcare organizations, manufacturers, etc., mostly used to take advantage of it in the past. Nowadays, however, things have changed, and it’s not uncommon to see various small business owners use it as well.
Since they don’t have as much funds at their disposal compared to larger corporations, they can really benefit from having such an option available. This is one of the three popular financing options, and if you’re interested in a side-by-side comparison of them all, additional information is available at InvoiceFinancingAustralia.com.au.
Now that we’ve laid out the basic terms and explained them, it’s time to go over the benefits of invoice financing:
- You still get your money even if you don’t have a collection department (or if it’s understaffed)
Chasing down people who owe you money and haven’t paid you yet is not only frustrating, but time consuming as well. To top it off, this is the kind of time you’d probably much rather spend on other meaningful things like growing your business, getting new leads, studying the marketplace, etc.
But it could very well be that you need them to pay you, otherwise you could likely have a hard time resuming your operations. At this point, you’re simply going to need to come up with a way to collect what they owe you, and it’s better to do it in a way that’s as conflict-free as possibe.
Filing a complaint to one of the regulatory bodies is an option, but it’s bad for business; you don’t want to get on their bad side, since that would diminish the chances of them willing to do business with you again. Lawyering up and chasing after them in a court of law would probably have a similar kind of effect, so it’s best avoided.
With invoice financing, however, there’s no need to resort to such drastic measures, and it’s a win-win for everyone involved. You get your money in advance while still remaining on good terms with the debtor, the financier gets a cut, and the debtor gets more favorable terms and more time to pay up (plus, none of this ever gets public, unless you willingly release the details).
- Invoice financing is a great way to get funded, even if you don’t qualify for a loan
If you haven’t remained in the business for long, the banks will not be as willing to entrust you with their financial resources. They need some kind of an indicator that you’re a reliable business partner who’s going to be paying it all back in a reasonable time-frame, and with newer businesses, they simply don’t have that. The fact that their approval criteria seems to be getting stricter and stricter with each passing year probably doesn’t help either.
In case you’ve ever had a problem with being able to pay on time and if your credit score is not in bright shining colors, you’re going to have a hard time trying to qualify for one. Besides, borrowing money and paying it back in monthly installments is another financial burden, which is not something you want to be aiming for, especially if all you’re really trying to do is to come up with a way to get over the temporary financial challenges, the ones you don’t deserve to be dealing with in the first place.
Invoice financing doesn’t require any of that, as there’s not as much to qualify for, at least comparatively speaking (there are some rules, although not nearly as demanding). All in all, finding a good service provider is all you really need.
- You won’t have to wait around for an unforeseeable amount of time
You could easily end up having to wait weeks or even months on end before they finally decide to pay you. Can you truly afford to wait around for that long? What if there are bills you need to pay yourself? What if you need the money to chase after a once-in-a-lifetime opportunity or if it’s time to pay your staff? Don’t pay them on time, and you risk losing them for good – they’re simply going to flock to another employer.
Additionally, not paying your bills on time certainly won’t spell out any good news for your credit score. And these are only a couple of examples – there’s other trouble that can befall you if you don’t pay what is due. Understandably, doing so is quite challenging if others don’t pay you, and this is where invoice financing really shines; it allows you to get access to the money pretty much in an instant.
That way, you won’t have to stain your credit history, you won’t have to pass up on business opportunities, and you’ll be able to pay your staff and invest in new equipment, etc. Even if you only get ¾ of what they owe you, the fact that you’re going to be getting it as little as a single day is well worth the drawback in most cases.
- Invoice financing doesn’t have an upper cap
Let’s say you’re trying to solve the given financial situation by applying for a loan. What you’ll find is that most banks will place a limit on how much they’re willing to lend you. In comparison, invoice financing doesn’t really have an upper cap – it’s directly related to your overall sales volume. That way, it’s possible to get access to a much higher sum of money, and – since you won’t have to deal with long-winded interviews and lengthy approval processes – also be done with it at a much faster rate.
Even if you have a lot of open invoices, these won’t hinder you on your way to becoming a financial success and take your business to a whole new level. It’s just a matter of making the right call of whether you can afford to wait around to receive the full sum listed on the invoice, or if you’d rather receive a slightly smaller amount instantaneously. There are no right or wrong answers here, since it depends on your unique circumstances. But when all is said and done, invoice financing, when used wisely, is an important tool to keep in your financial arsenal.
- There’s no upfront investment
Other ways of getting the invoices covered typically involve upfront costs stemming from litigation costs, hiring someone to get the debt settled for you, and so forth. But with invoice financing, you don’t have to worry about any of that. In fact, once the financier gets ownership of the invoices, all the remaining hassle of having to actually extract the money from the debtor lies on their shoulders.
So not only does invoice financing save you time, it also saves you from incurring upfront costs and gives you access to some much-needed funds in a matter of a single business day. What’s not to like about that?
Due to the reasons we’ve mentioned, it’s easy to see why invoice financing has become so popular among small business owners. It’s virtually hassle-free and in exchange for a small fee, it allows you to spend your time and energy in a much more economical manner. Moreover, this is all while leaving your options wide open and financial means available and ready to be utilized, allowing you to grab a business opportunity by the horns should it ever present itself. Are you ready and willing to apply this newfound knowledge to your own business?