When it comes to financing your business, you may have heard the terms invoice financing and factoring. Unfortunately, if you’re like many business owners, you don’t know exactly what they are?
Invoice factoring and financing are one source of funding for business, however, they’re not a regular loan. It’s somewhat similar to a secured loan because the funding is secured by your outstanding client invoices that are unpaid.
Both methods of funding allow you to borrow against the value of your unpaid invoices, which lets you reduce the date between the invoice and the due date for a fee.
What Is Invoice Financing
If you have an in-house credit control system or have an outsourced provider handling invoicing for you, then invoice financing is the best options.
The invoice finance provider will provide you with funds that equal a percentage of your outstanding invoices. Usually, that rate is around 90 percent.
You remain responsible for obtaining payments from your customers, as well as all other aspects of the invoicing process, therefore you remain in control of your company’s finances. Then when an invoice is paid, you receive the balance owed.
You must take into account the amount you borrowed and the finance fee, each time you receive payment on an invoice.
What Is Factoring
If your business does not have in-house credit control and would like to take advantage of invoice financing, you can use factoring, which is a full-featured financing solution.
The factoring provider will take care of all of your business’s credit control processes. They will chase down outstanding invoices and speed up the time it takes to receive payment from customers.
Some business owners are reluctant to hand over their credit control functions since it means giving up control of one of the key elements of your business’s daily operations. However, by outsourcing to an experienced, professional third-party provider, a company can streamline their invoicing process, making it possible to receive payment quicker.
The Benefits That Your Company Will Gain From This Funding
There are several benefits that exist for a business using invoice financing and factoring. The benefits are different depending on the size of the business.
This can be used within 12 months of business to access funds, during this time other forms of financing may not be available. Most other funding sources will require one year’s account to be on file before they provide financing.
For Medium Sized Businesses
This is one way to bridge the gap between when you invoice a customer and when you receive payment. This can let you unlock needed funds to use for expansion or purchasing more stock.
For Large Firms
Invoice financing offers a form of low-interest rate borrowing. The fees for this funding is agreed to up front and there is no worry about accumulation of interest.
The Processes Of Invoice Finance
Invoice financing has three stages: 1) Invoice, 2) Notify and 3) Borrow
First, you issue a standard invoice to your customers or clients. Then, you notify the lender of the amount of those invoices. After that, you borrow the funds.
When the invoice is paid then you will receive the remaining balance, less the agreed fee, which the lender retains.
The decision as to whether you should use invoice financing or factoring depends on whether you already have a system to handle your invoices. If you do not then a factoring provider will be able to assist you with the invoicing process. If you do, then you can benefit greatly from invoice financing.
I hope this helps to increase your company’s cashflow for great success.