Every business, no matter what the size has cash flow management problems at times.
Companies have to invest both their resources and their cash into the production of their products and services. They then have to wait until the payments are received before they can recoup their investment. The time between the payment and the money spent can be unpredictable and that is where cash flow problems start.
Cash flow issues can be a thing of the past by taking up the option of invoice financing. This form of cash flow infusion can shorten delays and can take the pain away from having to wait to get paid for work that has already been carried out.
What Is Invoice Financing?
Invoice Finance is a way for a company to get paid in advance for outstanding invoices owed to them. Most of the money owed to the company can be loaned based on these outstanding invoices.
Invoice financing companies provide much-needed credit for a business’s cash flow in the short term with many different services offering a variety of terms.
The way that invoice finance typical works is that the invoice finance company will pay off any balance that a customer owes the business and then provides a percentage of this sum to the company.
The invoice finance company will then take over the responsibility of contacting the customers and collecting the money owed.
There are two different methods of invoice finance and are invoice discounting and invoice factoring.
Invoice Factoring is the most common form of financing invoices. This is where a company sells its invoices to a factoring company. That company then collects the money due on the invoices.
The factoring company takes its commission from the money paid and delivers the balance to the company, which happens after the customer makes a payment towards the invoice.
Companies can work to control their debt collection with the help of invoice discounting. A discounting company advances money to a business based on what is due to them on their existing invoices. The business will then pay back the loan, plus interest, to the invoice discounting company.
This is a more confidential approach, where the businesses customers are not aware that the businesses using the help of an invoice discounting company.
What Is The Best Method?
There are advantages and drawbacks to both invoice financing methods.
With factoring, a third party gets directly involved with the business’s customers and there is no way for the business to control how that factoring company treats their customers.
This problem does not exist with discounting. No business customers are dealt with by the discount company, so customer relations remain intact.
Since the company is borrowing against their invoices, though, they have to pay back interest, and they can only pay that loan back when they get payments from their customers.
Benefits of Invoice Financing
It is easier and faster to get money with invoice financing when comparing this method with bank loans.
It can help a business grow faster by improving cash flow without a lengthy loan application and approval process.
There are still costs to pay, but they are negligible when they are compared to the value in gaining new customers and growing a successful business.
Check out your local Invoice Finance companies that can help your business release funds and increase cash flow.