Essential Things To Know About Invoice Finance

What is Invoice Finance

Invoice finance is a type of business funding, where money are lent against the invoices that you have sent out to customers but are not repaid yet.

At first it’s a bit confusing, but it’s a really simple process once you look at your business pipeline.

How Does Cash Flow

When you sell products and services you send them invoices for the billable amount. Very rarely do these get paid on the second. The typical period for which to expect payment is 30-60 days. During this time, you need to have sufficient funds to operate your business and pay all business expenses like vendors, sub-contractors, utilities, rent and your staff. The list of things you need to pay is really, really long so we’ll stop at here.

Your business still has finite resources, and if the discrepancies between your inflow and outflow cash are really great, your working capital will grow thin. This puts you in an uncomfortable position to do effective business and you can lose out on sales and suffer penalties and debt.

How Does Invoice Finance Fix It

When you opt into invoice finance, you can unlock the financial value of your invoices. The invoice effectively becomes an asset which you can sell or borrow money against.

The factoring company will buy your asset (invoice) and will give you the largest portion of it’s value within 48 hours, usually half time.

Depending on the arrangement, this can be anywhere from 75% to 95% of the invoice value.

This will give you enough working capital to secure your business flow and even make room for growth.

In the meantime, you or the factoring company (depending on the arrangement) will chase the client for payment of the original invoice. When that finally happens, the invoice discounting company will charge you their funding fees (usually 2%) and repay the rest of the funds into your account.

It still costs you money, but it puts you in a very comfortable state, where you can better optimise your spending and earning and get better deals. Ideally, factoring the invoices will pay itself off generously earn you many times more than it’s cost.

How To Get Into Factoring

You can always just approach invoice discounting companies yourself, but you’ll face the same issues as with choosing a bank for your business funding – there are too many offers and companies that sound like they give you the same thing, but devils is in the detail.

Instead you might want to approach a factoring broker who will hunt down products and companies that serve your best interest. Still it’s a good idea to research your brokers as well as you would your bank, since many of them are affiliate with funding bodies and work in their best interest, not yours.

You want to work with an independent invoice finance broker, who has no financial affiliations. They will give you an unbiased advice that will highlight your best factoring options and deals.