How Does Invoice Financing Work, What Are the Pros and Cons and How to Qualify

“Get the fact, or the fact will get you.” That’s why much small business may need some extra funds at the wrong time. Invoice financing can be a possible answer to their needs.

How Does Invoice Financing Work?

How invoice financing works is that you send your invoices to your financing company. No changes to your invoicing procedure are necessary. You will simply send the invoices just as they are.

How does it work?

The use of a factor requires the establishment of a financing contract setting  the conditions of delivery of your customer invoices. You can then transmit your invoices as and when they are issued:

  • The factor quickly advances you the amount of the entrusted invoices
  • For the service rendered and the cash advance awarded, the factor takes commissions on these invoices
  • The factor then manages the collection with your customers as soon as the deadlines of the invoices are exceeded

Many financing companies allow you to enter a summary of the invoice via an online website where you would show what the payment cycle is for the customer. The payment cycle will include how long the grace period is for delayed payments also.

Pros of Using Invoice Financing:

  • Better Manage Your Cash Flow: Financing makes it possible to optimize cash flow by reducing the impact of payment delays. The traditional financing company pays the financed amount directly to your account, within the week. This is often a real relief for businesses.
  • Eliminate The Risk Of Unpaid Bills: The banks propose to guarantee up to 100% of the risk of unpaid accounts receivable. On the other hand, “simple” credit insurance will often only cover part of this risk.
  • Focus on Your Business: A financing company takes care of the management of your customer account. This saves time and money to focus on what matters to your business.

Cons of Using Invoice Financing:

  • Contracts That Are Too Expensive For SMEs: Financing solutions offer attractive rates at the outset. Financing companies often ask that the manager be a personal surety.
  • A Very Restrictive Solution: Generally, a financing contract is binding over several months or even years. It is also common for financing companies to lock all receivables.
  • A Customer Relationship in Danger: The customer relationship is very important for many companies, who do not prefer to outsource the stimulus. If financing is often well received by customers, some factors can be indelicate in their recovery which can compromise the relationship with the customer.

How to Qualify For Using Invoice Financing

As with all financial services, some criteria do need to be met to ensure that the financing contract will be beneficial and sustainable:

  • Your business must issue invoices for goods or services of a reasonable amount
  • Must trade with other businesses and have several customers
  • Must offer credit terms that meet industry standards
  • Must prove that debts can be collected within a practical timescale
  • Must have a minimum turnover of £100,000 (although some invoice financing companies will consider smaller businesses or start-ups)
  • Sometimes a minimum or maximum number of invoices a month must be met

If you are unsure whether your business fully meets these conditions, it is still advisable to speak with a financial service provider.

Using invoice financing can get your money to you faster and can also allow for better payment terms for your customers. Invoice financing is easy to do when you use a reputable financing company to finance your business.

How Can Invoice Factoring Help Your Business

If a buѕіnеѕѕ is іn fіnаnсіаl trоublе, receiving proper fundіng саn be difficult, іf nоt іmроѕѕіblе. Banks may nоt bе wіllіng tо tаkе a сhаnсе оn whаt thеу vіеw as a failing рrоduсt. Sо, оftеn, a buѕіnеѕѕ will turn to thе process оf fасtоrіng tо raise money for a ѕhоrt-tеrm tіmе. Factoring allows a buѕіnеѕѕ to bоrrоw larger аmоuntѕ of mоnеу thаn thе uѕuаl lоаnѕ оffеr. Thе buѕіnеѕѕ can thеn fіnаnсе itself. Thе асt of іnvоісе factoring іѕ a more ѕресіfіс approach tо this рrосеѕѕ.

Fortunately, there is another option that business owners can opt for, invoice factoring. It is an option where owners look for the services of financial companies where they can get immediate cash from their buyer’s purchase. This is more efficient since businesses can get finances in case the payment is given after a certain period. Moreover, by opting for invoice factoring, business owners can obtain better benefits for their business.

Factoring offers many benefits to businesses. In addition to its flexibility and speed of implementation, factoring improves the working capital of companies and relieves them of the management of their receivables.

Listed Below Are Some Of The Efficient Benefits One Can Enjoy.

  1. Improved Cashflow: Since financing companies can provide you with instant cash after opting for their services, owners can improve their cash flow to cater to their needs. For instance, business owners will have the chance to integrate new solutions, devices and even software to make their business more efficient.
  2. Better Financial Control: With the use of invoice factoring, owners can also enjoy better financial control. They can even make financial decisions promptly to ensure that their businesses ventures can yield better results.
  3. Minimize Debts: Getting loans from financial institutions have certain interests you need to pay. Hence, in case that you cannot pay the loan in time, interests can increase, and it can be one reason for businesses to have substantial debts.
  4. Cash Always Available: Invoice factoring allows a company to have immediate cash flow and improve the presentation of its balance sheet. It intervenes in addition to its traditional banking facilities and helps to consolidate or create medium / long-term resources by allowing the company to devote almost all of its permanent capital to investments and to present the banks with an intact borrowing capacity.
  5. Enhanced Business Function: Since you have the finances for your business, you can ensure that you can find the ideal solutions that can enhance your business functions. These improvements can also help you provide the services your clients need to obtain better features and make their life better and more efficient.
  6. Ability To Settle Outstanding Debt Obligations: If you owe any money to lenders or the government for back taxes, you can use the capital that you receive from the sale of your invoices to pay off your debt obligations and in the process increase your credit rankings.

In conclusion, invoice factoring has so many benefits and advantages, that any company that utilizes invoices in their businesses, need to take advantage of this alternative form of business financing. It is a fantastic and viable tool that can be utilized at any time to increase the cash flow and working capital that you need for your business.