There are a myriad of reasons that can lead to slow cash flow for a business. From unpaid debts to increased inventory demands and even a change of economic environment, enterprises suffer cash flow problems at one time or the other. Small businesses are particularly hit hard by a slow flow of cash, making it hard for them to meet demands in a timely way. When this happens, invoice financing could save the situation.
What Is Invoice Financing?
Invoice financing refers to a model where you use outstanding invoices owed to you to acquire cash for servicing business needs. If, for instance, you have made supplies to company x and have agreed to pay you at a later date, you can use this invoice to acquire cash from other sources to help you meet some of the expenses.
It is sometimes confused with invoice factoring. However, for invoice factoring, the financier helps the recipient to chase the debt while in invoice factoring the cash recipient chases his debtors.
How does it Help Business Cashflow?
Fixes Quick Cash Problems
With this arrangement, you can acquire quick cash to meet business needs once you have made a delivery and managed to invoice a client. If you have an existing relationship with a factor (lender), it gets easier because the turnaround time for needed cash could be shorter. For first time purchasers, it may take a couple of days or up to about two weeks for proper verification to be done. Under such an arrangement, business operations keep running without a hitch while payments are being processed.
Business doesn’t into debt
It is essential to highlight that invoice discounting is not getting a loan. You sell assets (invoices) to meet immediate running costs. This line of credit for small business is especially helpful for businesses avoiding getting into debt or that don’t qualify for traditional loan systems.
Although loans remain a suitable way of financing, they are still hard to come by, especially for small businesses without collateral. With invoice discounting, they can be avoided altogether.
Invoice discounting facilities are extended with the trust that clients will keep their end of the bargain by paying on time. Putting this into consideration, the business can concentrate on growth without worrying about immediate cash.
You can get partial invoice discounting
The kind of arrangement you make with the financier is key to enjoying the benefits. As the invoice seller, you can choose only to sell a portion of the invoice. In so doing, you cut the cost, and you still have portion money when the client pays. Previously discounting companies demanded full control of the accounts receivable, but the models have changes to allow partial financing.
Confidence in Taking On Big Projects
Cash deficits hinder small businesses from chasing big projects. They lack the confidence and the capacity to handle then, even when they have other strengths and expertise to handle them. Invoice discounting can help a business bid for such projects with the confidence that they can garner the cash to deliver. They may rely on the same project for financing or use invoices from previous projects to get the cash required.
No Accumulation of Expenses.
One of the major reasons why businesses opt for invoice discounting is to meet expenses such as salary payments, monthly utility bills, restocking, and so on. When such needs are left unattended, they negatively affect the bottom line of the SME. Invoice discounting comes in handy, allowing the business to reorganize as they await payments.
Over the years, invoice discounting has undergone some changes, especially in their financing models. Today, invoicing companies are more flexible in the way they finance businesses, and it is easier to cultivate a long term relationship. In many ways, this method of acquiring cash is the right way of fixing immediate cash flow problems for businesses.
In modern times, there are a number of arrangements that SMEs can enter with discounting companies to allow them to meet these needs. However, it is vital for businesses to organize for long term solutions by addressing internal and external factors that affect their cashing systems. In addition, an SME must look into the overall cost of invoice discounting before choosing it as a suitable model.