A common issue a lot of start-up businesses have is the absence of capital. Owners invest thousands of dollars into a business, but gaining a profit seems impossible for the first few years. This is why a lot of those owners try to find a bank or other similar financial institutions that are willing to provide a loan. Unfortunately, these companies often avoid lending money to newer businesses. So, if you need some quick cash flow in your company and if you have a lot of money stuck in invoices, you should consider invoice financing.
To a lot of people, the idea of invoice financing is completely unknown and confusing. And I get that. It really is confusing if you have not heard about it before. If you want to understand what it means, you will probably need a bit of guidance.
Fortunately for everyone that wants to be more familiar with this kind of financing, I decided to write this article so that beginners can use it as a guide for 2022 and in the oncoming years.
How does it work?
Before I can write about the various benefits or advantages of this kind of financing, I think I should first explain how it actually works.
Let’s start with a short explanation first. As a business owner, you will be selling your customer’s invoice for a product or service to a third-party company. That company pays you around 80% of the invoice. Sometimes more, sometimes less. Depends on the company. Once the customer pays their outstanding debt, you get the remaining 20%, minus a few fees.
So, yes, you might lose some money during the process, but the benefits of this kind of system heavily outweigh the losses. This kind of instant cash flow is essential for young and new businesses. Your company needs that revenue immediately to continue growing. Otherwise, you would have to wait for all of your customers to get paid.
Why limit your company in such a way when invoice financing exists?
Better cash flow
If you still cannot grasp the idea of how all this works, maybe I should start talking about the various benefits.
One of the better benefits of such a service is the fact that the company’s cash-flow will considerably improve in a short amount of time. For new business owners, this is a great advantage. This allows you to take care of any expenses immediately. No need to look for loans and to get your company deeper into debts.
That improved cash flow also gives you the freedom for growth. You will have the capital required to grab the right opportunities. If your money is stuck with buyers, you will probably miss out on all of those opportunities for growth.
Most companies offer their funds for the invoice in just a few days, not weeks as suggested by www.portercap.com. It is possible to get the funds in less than 24 hours. It depends on the situation.
Longer payment terms
A lot of start-up businesses do not have the freedom to offer any long payment terms. For some, even 90 days is too much. Everything above 90 days is a risk for the company. For certain customers, this can be a deal-breaker. Not everyone can come up with money in such a short amount of time. I know, 90 days sounds like a lot, but it really isn’t.
So, if you want to keep your clients happy, you can start offering longer payment terms. Try 120, 160, or 200 days. If you want, even more. Try out different offers and see what works best for your business and your customers.
Obviously, if you want to take this kind of risk, you will have to consider invoice financing. Whether the customer pays in the next 30 days or in 6 months, it does not really matter. You already have 80% of the cash and that is all that matters. You already have access to the funds and the freedom to spend them as you wish.
Choose which invoices to sell
If you are worried that you are going to be stuck in some long-term, sketchy contract, you should not be. Usually, the contracts are pretty loose, so you probably will not lock into anything. You will have the freedom to choose which invoice you can sell and which ones you are going to keep.
Of course, these kinds of things depend on the company that offers such services. Some may have a much stricter contract. So, be careful where you sign your name.
Anyone can qualify
If you are afraid that your business is too deep into debts or other problems and that you will not qualify for such services, you might be wrong. Most of the time, it does not really matter what kind of debts you have. Almost anyone qualifies.
Naturally, some extreme cases might be a very high risk which is why those are avoided. I assume that you do not consider your business to be in one of those extreme cases, right?
Even if you are such an extreme case, I suppose there are some companies out there that will be willing to provide you with invoice financing. Of course, at a higher price.
Above, I mostly wrote about invoice financing, how it works, and the benefits of using such services. However, I know that people will also want to know about the disadvantages. You cannot make a decision if you do not properly do your research, right?
Well, you might be surprised by the fact that there aren’t a lot of disadvantages. The only disadvantage I can think of is the fees. But, they are usually just a small percentage of your sales, so I do not think that they will bother you too much.
I hope that this article has provided you with clear information on the topic and that you will be able to use it as a beginner’s guide for invoice financing.