New companies usually have cash flow problems. In order to attract new customers entrepreneurs are forced to offer flexible repayment plans, but then they need to wait 30 days (and more) to gain funds that are necessary for their future investments and daily business operations. Many entrepreneurs see invoice financing as a solution for this common problem.
Invoice Financing Basics
Invoice financing is a process where one business uses its unpaid invoices to receive a loan from another business or an individual. Most invoice buyers offer two types of funding arrangements. They can either ‘buy off’ company’s invoices for lesser price, or they can pay a full invoice price, but charge a fee that depends on the invoice’s due date and debtor’s credit score. Both of these arrangements provide cash advances to companies, immediately after signing the deal.
Invoice Funding as a Long Term Strategy
Although most people view this type of financing as a short-term solution for obtaining capital that can be invested in further development, invoice financing can also serve as a long-term strategy in many industries. It allows companies to approve lengthy and flexible repayment plans to their customers, without creating cash flow problems.
Since the whole process is done discreetly, customers aren’t aware that company is using invoice financing. This is very important, because customers are not always ready to rely on companies with cash flow problems.
These are some of the businesses that use benefits of invoice financing.
- Tourist agencies and other seasonal businesses, which offer year-round repayment plans, often use invoice financing to plan, organize and improve their seasonal offer during off-season periods.
- Tech startups and other fast growing companies, use invoice financing to increase their investment capital, which they will use for speeding up their company’s development.
Invoice vs Regular Business Loans
Some businesses would never develop their operation if it weren’t for invoice loans. Invoice financing is a much better alternative to regular business loans and lines of credit. These are some of the most important advantages this financing concept brings:
- Invoice financing doesn’t create debt;
- Allowed loan amounts depend on your sales figures, which means that you can’t lead your company to bankruptcy by taking the loans you can’t repay;
- Invoice loans don’t affect your credit score and they don’t depend on it either;
- Unlike regular business loans, invoice financing requires minimal paperwork;
- Invoice financing companies usually allow you to take your advance the same day, while banks need at least few days to process your application;
- Unlike business loans, invoice loans don’t require you to pay the deposit;
- Invoice financing companies allow you to repay your loan before the agreed date, while banks and credit unions charge early repayment fees.
Invoice Financing Shouldn’t Be Used as Debt Recovery
Some companies also see this concept as a great chance for relieving themselves from bad debt. Although invoice funding seems like a perfect replacement for debt recovering activities, entrepreneurs should use it only when they are 100% sure that customers are going to repay their debt. Invoice financing arrangement that guarantees 100% of invoice sum, requires you to pay a special fee that depends on the time required for invoice repayment. Taking an invoice loan doesn’t mean that you sold your claims, it only means that you’ve use them as a deposit to get an invoice loan and you are still responsible for charging your invoice and paying back the agreed amount of money to your invoice funder.
On the other hand, in invoice financing, you can use your claims to earn more revenue. By using invoice funding, startups can sell invoices with longer due dates (30 days and more) and then use this money for smart marketing investments that can double or triple this sum before the invoice expires.
Invoice financing is a great concept that benefits small businesses and helps them to overcome cash flow difficulties. This concept also benefits our economy and supports its growth. That’s why companies should use this type of financing in all phases of their development and they will be able to turn debt into profits.