Essentially, invoice financing allows the company to receive immediate payment for products supplied and invoiced, so the cash can go back into the company to buy more inputs in order to sell more products faster, thus increasing turnover and profits. Invoice finance allows businesses to receive immediate payments on invoices; thus, they can keep running their businesses with no disruption. With invoice financing, businesses can sell outstanding invoices to a creditor so that they get quick cash.
Invoice finance helps businesses increase their cash flow, pay employees and suppliers, and reinvest in operations and growth sooner than they would have had they had to wait for customers to fully pay off the balance. Because invoice financing is usually paid off within one or two months (when a debtor pays) rather than after years/s, businesses are able to access those funds that they need over and over, much like a revolving credit line. Invoice financing can address problems related to customers taking long periods of time to pay and also difficulties obtaining other types of business credit.
It may even make sense for a small business to use invoice financing if the payment terms on invoices are very long. Invoice financing allows businesses to pursue bigger, profitable contracts without being stretched too thin because they are able to get immediate cash out of invoices that they send out to larger businesses upon the work being completed, rather than waiting for the usual 30–60+ days to receive payments.
Invoice finance is thus generally worth it only for very large amounts of outstanding debt or if the company needs cash very fast, such as if cash shortages are looming. A business with mostly private customers, and no commercial customers, generally cannot take advantage of invoice financing since factoring providers usually offer their services only to businesses in the B2B industry. Through invoice factoring, the business would sell its accounts receivables in order to increase its working capital, which would give the business instant cash which could be used to cover business expenses.
The factoring company would immediately pay you on your invoices and then collect money from your customers. As a business has an agreement with the factoring supplier, the supplier pays 80 per cent of invoice value instantly. The factoring company pays the invoice amount to you minus fees plus a small proportion of the invoice, which is retained until the customer settles the invoice.
The pressure of having good credit is taken off you. A factoring company will have to check the creditworthiness of your client before taking on an invoice. With this approach, a factoring company finances your invoices, but customers are not informed about a factoring contract, so they are still paying your vendor directly. Customers are informed that their invoice has been assigned to the factoring company or a financial institution offering the service, and it is they that must be paid directly when the invoice is due.
With invoice factoring, customers will have to pay the creditor directly, while the financial provider is responsible for tracking down any missed payments. If you are interested in it, you can look more into invoice factoring in Australia to learn about how the process works and decide whether it is the right option for you.
Invoice financing may be especially helpful to businesses that have a few customers paying high-value invoices: In those cases, a late payment on an individual customer’s invoice could be risky for the company’s overall health. Especially for smaller businesses, if one client is late paying a larger-value invoice, this could significantly affect the overall health of the company. Many businesses operate on a delayed payoff schedule – typically 120 days – on invoices, which can be taxing for finances.
A business sells goods or services to a customer, and it generates an invoice – often with deferred payment terms of up to 120 days. The business needs to have immediate access to working capital, so it sends the invoice to a bill discounting vendor, applying it to them as collateral for a short-term loan. Once a client pays off the invoice, the business pays back the loan, plus interest and other fees applicable.
Once a cash advance is approved, a lender forwards funds to a business, less any applicable fees. Assuming that a lender gets all payment on outstanding invoices, they will then forward the remaining 15% to 30% of invoice amounts back to the company, with the business paying the interest and/or fees of invoice factoring.
With invoice financing, cash which has been locked in outstanding invoices can quickly become liquid cash, which keeps business cogs turning and accelerates its working capital cycle. One of the benefits is invoice finance allows for improved cash flow. This is done by freeing cash tied up in outstanding invoices, giving your company immediate cash injections and a continuous flow of cash growing with sales. When a company has immediate access to cash tied up in its invoices, they are more easily able to handle its daily expenses and keep its cash flowing.
The payments that you get from your invoice discount arrangements can be used for nearly any business purpose, like improving working capital, reducing debt, financing expansion, hiring new employees, or purchasing inventory and equipment. If you are in an invoice discounting arrangement, you can outsource the collection of your invoices to a financial provider, saving time and headaches and allowing you to focus on running your business.