In business, several tools allow you to improve cash flow and, at the same time, maintain good relationships with customers. One of these tools is invoice financing for a small business. As part of this concept, you do not sit around waiting for payment from customers but receive money from a reliable third party and continue to work with other orderers. Read the details of how this mechanism operates in the article from SaldoInvoice specialists.
What Is Invoice Financing and How Does It Work?
What is an invoice finance facility? It is a convenient option for entrepreneurs, especially small business owners, to borrow money owed to them by customers from a third party. You can get compensation for the work performed much faster by resorting to this method.
How does invoice financing work? The term “invoice financing” refers to several types of transactions with invoices and money. However, they all come down to the same essence: you transfer the bills issued after the completion of orders or projects to a third party, and in return, you receive the majority of the invoice sum (minus interest for the intermediary agency’s work). Depending on the type of financing you choose, the responsibility for collecting payments from clients may fall on you or the company that “redeemed” your invoices.
There are established standard payment terms in different industries that you need to adhere to. For example, if your industry has a 90-day payment deadline, you might not want to tighten it. However, you may not be able to afford to wait for so long. You need to use the financing invoice option to establish a money flow.
Advantages of Invoice Finance
Is invoice financing a good idea? The list of benefits of this approach will help you understand if the method is suitable for your business.
Better cash flow management
The main advantage of the mechanism is that you can get paid for your work much faster. Your arrangements with an intermediary company may vary, but as a rule, the funds’ transfer occurs within 48 hours. With money in your hands quickly, you can start work on another project, purchase materials, pay employees, and more.
Ease of use
Invoice financing is one of the simplest and most understandable of all financial instruments. The important thing is to find a reliable investor. The billing process with modern software like Invoice Maker by Saldo Apps can take place in minutes. You simply forward the generated invoices to a service provider electronically and expect a quick money transfer.
Flexibility and transparency
This method has no limits on the number of bills transferred or fixed minimum amounts, so any entrepreneur can resort to it. At the same time, the percentage an intermediary agency charges for its work is negotiated right on the spot. The amount of deductions in favor of providers depends on the transaction characteristics and risks. You clearly understand what you agree to, so you will not have unexpected expenses.
Invoice financing is a convenient tool for small and medium businesses, but it also has some disadvantages. Firstly, there are some industries where the risk of your client never making payment against your invoice is quite high. Secondly, you will have to lose part of the amount owed in exchange for such a service. With self-collection of compensations, you could get everything.
We’ve got invoice finance explained in this article so you can evaluate all the pros and cons for your business. Like any other financial instrument, it requires careful consideration.
