What is Invoice Financing and How Can it Help Your Business?

7 September 2022

There are many challenges that can undermine small and medium-sized businesses in the UK, which currently account for a staggering 99.9% of the private sector.

However, maintaining the requisite cash flow may be among the most pressing, with one in seven small business owners having been left unable to pay their employees due to a shortage of viable funds.

A further 38% of businesses have struggled to repay their debts due to limited cash flow. The good news is that invoice financing can help to optimise your company’s cash flow, and we’ll explore this in a little more detail below.

What is Invoice Financing and How Can You Benefit as an Entrepreneur?

Before we delve into the main advantages of invoice financing, you should be aware that there are two primary iterations of this funding vehicle. These include:

Invoice Factoring: With factoring, you’ll effectively sell your accounts receivable and borrow a fixed share of their value using your invoices as collateral. You’ll also delegate management of your sales ledger and credit control function to creditors. The money that you borrow is subsequently paid instantly, enabling you to avoid challenging 60 or even 90-day invoicing terms as a new business. As for the lender, they’ll get their money directly from customers and will see their debt settled once the invoices are settled.

Invoice Discounting: With this vehicle, you’ll simply borrow against your outstanding accounts receivable at a discounted rate. You’ll also pay a nominal fee to the lender, and invoice discounting works in a similar way to the overdraft on your company bank account in this respect. You’ll also keep control of your sales ledger with this type of funding, which may be a deal-breaker for entrepreneurs who don’t like the idea of outsourcing any aspect of your company’s management.

While there are differences between these two options, each enables you to optimise your real-time cash flow and operate to the best of your ability. But what are the exact advantages of this funding method?

  • #1. Access Immediate Funds: As we’ve already touched on, some small businesses may find themselves restricted by 60 or 90-day invoice terms (depending on the exact market in which they operate). You can negate this with invoice financing, however, accessing your funds just as soon you’ve completed work on behalf on a client and struck an agreement with your chosen lender.
  • #2. Apply With Ease: Not only does invoice financing create a short and minimal cycle of debt that’s relatively easy to repay, but the application process is also accessible and simple. This can also be done remotely, with minimal paperwork required and a growing number of operators in the marketplace. Because of this, the money you apply for can arrive in your bank within 24 hours.
  • #3. Repay Once You’re Invoice Has Been Settled: Regardless of which type of invoice financing that you opt for, the good news is that you won’t have to repay your debt until the client in question has settled their invoice. With factoring, the lender even collects the amount outstanding from the client directly, as you outsource responsibility for your accounts receivable.

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