Applying for small business loans is one way to give your company the additional cash it needs. However, if you’re having a hard time qualifying for a term loan from a bank , you might have to turn to other financing alternatives. Invoice financing is one such option many business owners usually turn to when looking to improve their cash flow.
Invoice financing allows entrepreneurs to sell their clients’ invoices to lending companies which provides them with needed cash in advance. It’s a useful financing option that’s available whenever there’s a shortfall in funds to pay for necessary business operations. With invoice financing, business owners are able to pay their staff, rent, equipment, and most importantly, improve their cash flow.
How Does Invoice Financing Work?
Invoice financing, also known as accounts receivable financing, is a common financing option that most businesses use to obtain upfront cash. With this type of loan, merchants are able to leverage their clients’ unpaid invoices that allow them to borrow money. To put it simply, the unpaid invoices act as the collateral for the borrowed funds.
This kind of financing is structured two different ways:
- Invoice factoring and…
- Invoice discounting.
Although both options work similarly, there are some notable differences which make each unique in their own way.
For example, with invoice factoring, the lenders assume full control of the customer’s invoices and oversee the chasing and collecting of payments. Invoice discounting, on the other hand, gives the business owners full control of their customer’s invoices and is responsible for paying the loan back to the lender. In both cases, entrepreneurs receive upfront cash against their receivables.
Why Apply for One?
As mentioned, businesses will inherit and enjoy a lot of perks if they apply for invoice financing. However, they shouldn’t take it lightly. Once they make a mistake, it could lead to their business’ demise. This is why it’s important you acquire all the information that is available before applying.
Nevertheless, here are some great reasons why you should apply for invoice financing:
Service Fees are Lower
Compared to banks, fees associated with invoice financing are much lower. Some lenders will only charge 1.5%-2.5% per invoice without hidden fees. Once the factor (lender) receives the full payment for each of the invoices, they will then deduct the loaned amount and return the remaining money to the business owners, minus the fees.
Businesses with cash flow problems often find it hard to fulfill payments to suppliers. As a result, they can end up experiencing shortages in their inventories.
However, by using invoice financing, not only will you be able to continue to accept new orders, but you’ll also be able to take advantage of discounted prices when buying in bulk. It’s a simple yet effective solution that lets you maintain a positive cash flow position while growing and expanding your business.
You Won’t Incur New Debt
With invoice financing, you’re selling your invoices to lenders in exchange for upfront cash. Essentially, you’re spending your company’s money. The only difference is that you get the cash earlier than you normally would. Because of this arrangement, you don’t have to worry about increasing your company’s liabilities.
You Won’t Have to Worry About Chasing Clients for Payments
With one of the invoice options, invoice factoring, the lenders (also called factors), will have full control of your invoices. This means they are the ones who will handle the collection of payments.
This is especially beneficial for smaller companies who may not have enough resources to be chasing after payments themselves. With invoice financing, small business owners don’t have to worry about contacting and billing their clients since the factor handles that.
With consistent, stable financing, you also do not have to apply the brakes when you see an opportunity you want to jump on. When you have a steady flow of cash coming in, you can be confident in the knowledge that you have the flexibility and option of taking on new projects and contracts, when and if you desire.
Additionally, invoice financing also allows you to offer your clients flexible payment terms. Customers who purchase in large amounts may need longer periods to pay for their purchased goods, which in turn will help you attract new customers, as well as increase sales and revenue.
Because you’re getting your cash in advance from lending institutions, invoice financing quickly removes the worry that is so often the case when you are waiting for your receivables to come in
It’s Easier to Apply for than a Traditional Bank Loan
Most business owners know how difficult it is to qualify for a bank loan. In fact, it’s no secret companies have to meet the specific, and stringent qualifications they impose. This makes it very difficult, if not impossible for start-ups to get approval on their term loan application.
On the other hand, invoice financing is easy to apply for and to qualify for. Unlike bankers, lenders usually don’t focus on the credibility of the business owners, but rather zero in on their clients. There’s also less paperwork involved which makes it even more of an ideal funding source for start-up business owners.
It’s no secret that an approval for a bank loan can run into weeks, whereas approval for invoice financing can be a few business days or even a mere 24 hours.
Improve Business Cash Flow with Invoice Financing
Just imagine the things you could do with a small business loan to back you up. With extra cash in hand, you can immediately jump on new opportunities, increase your business revenue, pay your suppliers on time and take advantage of discounted prices.
Don’t hesitate to talk to the finance experts today, and learn more about the benefits of invoice financing and what it can do for you and your business.
In fact – why not make it the very next thing you do?