While some argue that money is money and that it doesn’t matter what kind of payment your customers prefer, this is not necessarily true. As a new business, you will often need money in hands and when this happens, clients who pay with cash will become completely invaluable. Sure, there is nothing wrong with delayed payment, since the money is yours. However, on occasion the only money you will be able to count on will be that you have in your wallet or your account. Still, where there is a will, there is always a way.
What is Invoice Finance
Let’s say, for example, that you are in the retail service and that you give an invoice for the items you sell. Some people may choose to pay you in 6 months’ time, while some may pay gradually over the course of the next two years. Unfortunately, running business will bring some immediate costs and you, as a business owner, will often have to pay right away. When this happens, your safest course of action would be to turn to invoice finance for aid. In this way, you trade all those invoices you cannot charge for roughly 80 percent of their price immediately and 15 percent more when these receivables are charged.
In other words, you allow someone else to sell your account receivables, get most money in the first 24 hours and then just have to wait out for the rest. A factoring company you choose to do business with takes all the risk on itself and relies on the solvency of your clients. For all of that, you pay the fee, which usually amounts somewhere from 1, 5 to 5 percent of the invoice value.
Better than a Loan
In situation where their budget meets the bumpy road, some businesses apply for a loan. However, this is not always the best choice. Chances are that numerous small businesses already had to indebt themselves to even start the business, so borrowing once more could be another nail in the coffin for them. On the other hand, by going with invoice financing, you are not borrowing anything from anyone. You are simply getting what is yours, or would be yours in the nearest future. That simple.
Another advantage that invoice financing has over the loan is a fact that here you don’t have changeable variables like interest rates to worry about. You may get a loan under one set of circumstances, but most banks keep the right to change interest if the situation dictates it. This can result in you returning much more than what you originally received.
Not Just for Small Businesses
One of the most common misconceptions about invoice funding is that it is something solely meant for small businesses and startups. However, even medium or large enterprises can benefit from factoring. The only reason why small businesses may benefit from these kinds of agreements the most is because they don’t last long. Startups usually feel discomfort to oblige themselves to something that can last for years.
Also, seeing how most small business owners don’t have any serious collateral to offer, this kind of deal can come as a blessing in disguise. Given the fact that your situation is closer to trading your invoices than borrowing anything, your account receivables are the only guarantee you need. Finally, you have much more flexibility since you can choose on your own, how many of these invoices you want to sell and they usually don’t conflict.
While not as popular as some other forms of capital injections, invoice financing is most definitely the most flexible one. The procedure itself is very expedient and quite simple. You trade the money that is yours, but that you don’t have already for some immediate cash to keep your business afloat. This kind of solution can be used to deal with your business’ day to day costs, funding internal projects or even dealing with cash flow fluctuations in a seasonal business. All in all, it is always good to have all your options open.