Today, running a business requires that you have products or services available to fulfill customer orders. However, managing cash flow and capital can be challenging if you are waiting on payment for outstanding invoices and have new orders that need to be fulfilled.
One way to manage cash flow is through invoice financing. Essentially, you are borrowing money against the outstanding unpaid invoices your business is holding. Invoice financing has several benefits for businesses. Let’s explore those and how you can use them for your business.
What is Invoice Financing?
Invoice financing allows you to borrow money against the money that your customers owe you. That can help you to improve cash flow and give you capital to reinvest in your business right now instead of waiting for customers to pay their invoices.
Your lender will charge you a fee for borrowing the funds based on a percentage of your invoice amount. It can be a way to access funds that might take customers a significant amount of time to pay off.
Businesses can frequently sell goods and services to larger customers on credit. That means that the customer will be paying invoices at a later date. Offering this credit can get your business the sale, but it can also tie up funds needed to grow your operations, make improvements, or even cover overhead.
With invoice financing, you can sell your accounts receivable to the lender, allowing you to access funds that can be used for your business immediately. Your invoices act as the collateral, which limits the risk to the lender, although there is still the risk that your customers might not pay the invoices at all. That could result in a difficult collection process for you and your lender.
How Is Invoice Financing Structured?
There are a number of ways that invoice financing can be structured, typically through factoring or discounting. Invoice factoring is where you sell your outstanding invoices to a lender. That lender could pay you anywhere from 70% to 85% of what the invoices are worth.
If the invoices are paid in full, the lender will pay the remaining percentages minus a fee or interest charged for the service. The lender collects the payments from the customers, so customers will be aware of the arrangement, which could impact the professional reputation of your business.
Invoice discounting is an alternative that means you are collecting the payments from your customers, but the lender can advance up to 95% of the outstanding invoice amounts. Once you get paid by your customers, you repay your lender, but your lender will also charge you a fee for providing this service.
If you have set up 30 to 60-day payment terms with your customers, invoice financing might be a viable option to help get your business the cash it needs. In many ways, these lending options can provide a cash advance for the sales your company has already made. Thus, your business can benefit from the cash even before your customers pay.
Various lending options are available when it comes to balancing your business, its cash flow, and its expenses. Our team can help you find the right financing options to fit your needs, including working capital financing. Contact us today to determine what options your business qualifies for today.