The core nature of business is making a profit. In this endeavour, a company needs to make more sales than the incurred expenses. To do this, companies must rely on assets to offset liabilities. One critical asset is cash flow. Your business needs money to purchase raw materials or additional stock, pay for overhead costs, pay salaries, remuneration and more. But, what if clients don't pay your business on time?
Invoice financing is an excellent solution to such a predicament.
nvoice financing is a type of loan extended to businesses against an invoice. A lender uses your unpaid invoice as collateral to offer you the cash you need to offset your expenses. After settling invoices, the lender collects their sum (plus interest), and the remaining amount belongs to you. Typically, the loan can be up to 85% of the invoice amount.
There are several solutions to rectifying cash flow problems in your business. The first option is simply waiting it out until the issue subsides. If what you are funding can wait, it is advisable to avoid incurring debt. Conversely, there are some unavoidable expenses that the business should not wait to acquire.
In such a case, you could approach the banks for a loan; businesses can access secured and unsecured loans, each with different conditions. However, said loans can take time to process and have long payment periods.
Invoice financing for small businesses is the best choice if you urgently need a business loan. Here are some reasons why it could be the best option for your business:
• The loan costs are manageable as long as the business pays the invoice on time.
• They are fast to process, ensuring you have the cash you need immediately.
• They require a one-time payment, saving you from a long and complicated payment plan.
• The unpaid invoice acts as collateral, which leaves your other business assets free from such risk.
Small businesses can access different types of loans with invoice financing. The most common of these is invoice factoring and accounts receivables line of credit. Read on to find more about these.
Invoice Factoring
Invoice factoring is a variation of invoice financing; the business sells the invoice to the lender at a discount. Therefore, the lender will collect the sum owed to settle your loan.
Accounts Receivable Line of Credit
The lender will extend cash up to 85% of the invoice amount in this option. Once you settle the invoice, the lender deducts their interest and other fees from the remaining 15% and give you the balance. Your business remains the party responsible for pursuing payment on the invoice.
There are no clear regulations when it comes to invoice financing. While you'll find honest lenders in the market, you should do your research in order to find the best fit for your business. Here are a few things you need to consider when assessing the suitability of a lender.
1. Find out about the fees—the fewer and more straightforward, the better. Some lenders have numerous and complex costs that increase the cost of the funding.
2. Ask about the structure of the financing plan. Some lenders will buy the invoice, while others expect you to collect payment then pay back what you owe. Similarly, some lenders provide the complete 85% available financing while others need persuasion to offer anything close to that percentage.
3. Don't forget to find out what happens if the business doesn't pay the invoice back in time. Delays usually attract penalties or added fees. You need to know what those add up to determine if the financing is worthy.
As a small business, you need cash flow to sustain your operations. If your company lacks cash, you can turn to invoice financing to help you cover your expenses. Contact us today for enquiries about invoice financing and other finance options for small businesses.
