The turnover of cash in a business operation relies on the payment from customers. Sometimes, cash can be tied up when you need to wait for customers to pay within 30-60 days. To ensure a continuous cash flow, most small businesses turn to invoice financing. There are two forms of invoice financing, each with a different set of benefits. Businesses can either opt for invoice discounting or invoice factoring.
Invoice financing overview
How does invoice financing work? Simply put, it is the process of getting access to the funds tied up in unpaid customer invoices through the help of a lender. Once you have found a lender, you will need to agree to the terms set by the financer. A copy of the invoice you send to your customer should also be furnished to the lender. Oftentimes, you will get paid up to 95% of the amount owed on the invoice. When the payment is due, your customer will pay the amount owed. You will get the balance of the invoice minus the fee paid to the lender. What’s unique about invoice financing is that no other assets are required as collateral aside from the invoice itself.
What is the difference between invoice discounting and invoice factoring?
The differences between these two types of invoice financing will determine their compatibility with the type of business aiming to use it.
- Invoice discounting. Of the two types of invoice financing, invoice discounting is considered to be more simple and straightforward. It is ideal for larger companies that have the capability to control credit operations in-house. This means that the company will be responsible for following up on payment from customers and have greater control over their finances.
- Invoice factoring. This option is preferred by small businesses. Some additional features that come along with this option are credit control and collection. What happens here is that the business hands over the control of their sales ledger to the financer. This means that the process is no longer confidential, and the customer will be made aware that you are working with a financier.
Benefits of working with a financer
There are a lot of benefits when a business chooses to work with invoice lenders. One of the primary motivations for choosing invoice financing is to get the cash flow going. This will help the business divert the funds into operational expenses such as purchasing inventory, making payroll, etc.
What’s most attractive about the offer is that there is no need for the business to provide any additional collateral. The funding is already secured and the amount that can be financed is certainly higher than what a regular bank loan would normally offer.
Getting involved with invoice factoring is especially useful for small businesses because it helps them access a third-party credit control service without paying additional fees. It is also a highly effective source of funds for small businesses that are otherwise unable to find other funding sources to augment their cash flow.