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What is Invoice Financing and How Do You Apply It to Your Business?

What is Invoice Financing and How Do You Apply It to Your Business?

There comes a time in the life of every smallto medium size business when cash flow becomes a little tight. If this does not happen to you, then you are indeed among the few and the blessed. Such a thing will urge owners to look for outside funds toreceive temporary finances. While loans are undoubtedly one of the most common options, these are not actually the best choices due to a long duration to take full effect.

These days, more and more SMEs are utilizing new ways to finance things; ways that are much more flexible: This leads us to invoice financing. With many benefits, it isbecoming one of the top solutions tobringing about a solid cash flow. In this post, we will learn all the necessary details of this possibly not-well-known option, in regards to running a business.

What is invoice financing?

In simple words, invoice financing is a method that enables companies to borrow from the dues of its customers, including uncollected receivables and outstanding invoices. Instead of leaving these unpaid, impeding your operation. It is a good idea to sell these to a third-party service at a discounted rate. An example of this is It operates quite similarly to an on-demand business cash advance from outstanding invoices.

How does invoice financing work?

The standard process of invoice financing takes five steps:

  1. The company provides a product or service to a customer to get invoices.
  2. The company sends the details of these invoices to the invoice financing service.
  3. A percentage of the value of these invoices will be paid to the company, often within 2 days. This percentage will depend on their risk criteria.
  4. Depending on the method of invoice financing, the company may choose to chase the payment, which isusual, or requirethe financing servicewith collecting the funds itself.
  5. When the customer pays the debt, the remainder of the invoices, not yet paid off, will be given to the company in a timely manner.

The benefits of invoice financing

The most important benefit of invoice financing is to enable small and medium business owners to reclaim the control of their cash flow. In other words, they can exchange their invoices for cash within 1 to 2 days instead of waiting for weeks or even months for a loan from the bank or credit union.

Moreover, invoice financing can also provide businesses with enough money to pay for bills and launch new products, purchase new technology and equipment, develop new initiatives, open new branches, and restructure the business. They can fund the growth of the business without the burden ofdebts or liabilities. Thus, reducing the operating costs.

Drawbacks of invoice financing

Invoice financing has a few limitations and drawbacks:

  1. The overall profit of your business will be reduced due to the cost of the service.
  2. Your credit rating might be affected because the number of unsecured assets would be fewer. As a result, it might lower your chances of getting alternate
  3. Invoice financing services often purchase commercial invoices. This means it is difficult to find a financer if your business model is B2C.

How much does invoice financing cost?

Just as with a traditional loan, there will be a few factors that will determine the cost of an invoice financing service. It includes creditworthiness, time in the business, invoice value, type of product sold or service rendered, and it depends on the type of invoice financing facility. Many invoice servicing companies will have determinants based on the turnover rate of their businesses.

In general, you should pay a small factoring fee on every invoice financed by the provider. This will be a small percentage of theinvoices and might be deducted by the lender when your customers pay them in full. The balance will be paid back to your company.

How do you choose the right invoice financing solution for your business?

There are three factors that determine which service will be best for your company. These are your needs, financial strength, and the company size.For the most part, invoice financing can be used by a company of any size, from startups to medium businesses. More importantly, it can be relatively quick and simple for you to be qualified for these services. The major requirement is often to have outstanding accounts usable by creditworthy clients.


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