Invoice finance, also known as factoring or accounts receivable financing, is a form of alternative financing that provides businesses with immediate cash flow by advancing payments on outstanding invoices. This type of financing has become increasingly popular in recent years, particularly for small and medium-sized businesses (SMBs) that may struggle to secure traditional bank loans or face long waiting periods for payment from customers.
The traditional banking system has become more cautious in lending money due to the 2008 financial crisis and stricter regulations. As a result, many SMBs find it difficult to secure loans, which can cause cash flow problems and limit their ability to grow their businesses. This is where invoice finance comes in as an alternative to traditional banking.
Flexibility
Invoice finance is a flexible solution that allows businesses to receive cash payments for their outstanding invoices within 24 hours. The process is straightforward: a business sells its accounts receivable (outstanding invoices) to a finance company, which then advances the business a percentage of the value of the invoices, typically around 80%. Once the finance company collects payment from the customer, the remaining balance, minus a small fee, is paid back to the business.
Cash flow
One of the biggest advantages of invoice finance is that it provides businesses with the cash they need to cover their immediate expenses, such as paying bills, salaries, and suppliers. This can help to keep the business running smoothly and prevent it from becoming cash-strapped. In addition, invoice finance is a flexible solution that can be adjusted to meet the changing needs of the business, making it an ideal solution for businesses that experience fluctuations in their cash flow.
Quick and easy
Another advantage of invoice finance is that it is a quick and easy process. Unlike traditional bank loans, which take weeks or even months to approve, setting up invoice finance can be done within a few days. This is because the finance company is primarily concerned with the creditworthiness of the business’s customers, not the business itself. This makes it an ideal solution for businesses with a strong customer base but poor credit history.
Wait time
Invoice finance can also help businesses to improve their cash flow by reducing the amount of time they have to wait for payment from customers. This is because the finance company takes on the responsibility of collecting payments from the business’s customers, freeing up the business to focus on other tasks. In addition, invoice finance can also help businesses to improve their credit score by reducing their outstanding debts, as they receive payment for their invoices sooner.
Drawback
However, like any form of financing, invoice finance has its drawbacks. One of the main drawbacks is that it can be more expensive than traditional bank loans, as the finance company charges a fee for its services. In addition, the finance company may also charge additional fees for services such as credit checks and collections.
In conclusion, invoice finance is a valuable alternative to traditional banking for businesses that struggle to secure loans or face long waiting periods for payment from customers. With its flexible, quick, and easy process, it provides businesses with the cash they need to cover their immediate expenses, keep their businesses running smoothly, and improve their cash flow and credit score. However, businesses must be aware of the additional costs associated with invoice finance and must weigh the benefits against the costs to determine if it is the right solution for them.
Get in touch with us at Funding Bay for your invoice financing needs.
Check out our invoice finance calculator here.
