Invoice Financing: What It Means for Your Business Growth

Invoice Financing: What It Means for Your Business Growth

Thursday 22nd July, 2021

Every business owner appreciates the value of securing funding quickly. It is even more critical when a business is facing a cash flow problem. It means wages and bills will not be paid in time.

The natural step would be to seek a lender for some funds to keep things running. For a long time, traditional lenders such as banks have dominated the market as the go-to source for loans. However, in recent times, SMEs are looking for alternative funding after facing a cash crunch.

With more alternative funding options available for small and medium-sized businesses, it is the right time to get familiar with the terms; asset-based loans and invoice financing. Generally, these two options offer low interest rates and are closely tied to your business’ income or assets.

What Is An Asset-Based Loan? 

Asset-based lending is simply using collateral to obtain a loan or line of credit. The collateral is your business’ asset including receivables (main), inventory, equipment, or any other owned property. The upside of this type of loan is that you can access the funds against assets as needed to cover expenses or invest.

It is popular among small to medium-sized business owners as they can access quick loans when they face shorter cash flow problems. Due to the risky nature of such a loan, lenders prefer to use cash-based collateral, but can still consider physical assets. In addition, the amount of loan a borrower receives depends on the asset type. The lender has to conduct a background check on the borrower’s financial status such as financial reports before lending.

How Does Invoice Financing Work? 

Invoice financing is a type of asset-based loan which allows you to borrow based on unpaid invoices. It is also known as accounts receivable financing, invoice trading, or receivable financing.

It has come in handy for many businesses when they have tied up unpaid invoices and need to access funds immediately. While it is painted as a convenient financing option, it is important to understand the ins and outs as well as the types of invoice financing for informed decision-making.

What Are the Different Types of Invoice Financing?

There are normally five types to choose from based on your business needs.

1. Invoice Factoring

This stands out because lenders will help you collect payments from your customers aside from issuing you immediate cash. This can work well if you have a resource shortage to effectively handle payment collections. However, it can be risky for customer relations as third parties will be dealing directly with your customers.

2. Invoice Discounting

Invoice discounting is more discrete compared to invoice factoring because customers are not aware of the lenders collecting payments. This is better because it upholds your relationship with customers. But you are more involved in managing unpaid invoices.

3. Spot Factoring

With this type of invoice financing, you get to decide which invoice to sell to a third party or invoice factoring company. You can receive a certain percentage of funds instead of waiting for the customer to pay. The downside is it can be costly due to the urgent demand for flexibility.

4. Selective Invoice Financing

Also known as single invoice discounting, you are free to choose which invoice to finance, as opposed to your entire collection of invoices. It is advisable to carefully choose which invoice best meets your working capital needs efficiently, although you will deal with the collection process.

5. Auctioning Online

It works like spot factoring since you choose which invoice to auction on the online platform. Lenders get to bid on them, with the highest bidder financing the invoice.

Pros and Cons of Invoice Financing for Small Businesses

When facing a liquidity shortage, it is tempting to jump on the next best invoice financing option. However, it is important to critically weigh their benefits and risks in safeguarding your business.

The Pros

The Cons

Is Invoice Financing Right for My Small Business?

At this point, you may be wondering if invoice financing is for you. If you are looking for an immediate cash injection for your cash flow problems, then you could consider it.  Its strong point is submitting your invoice as collateral to immediately have cash deposited. In addition, unlike traditional loans, the application and approval process is simple, and you are aware of the borrowing fees beforehand.

However, it can be highly costly for your small business due to the high rates that come with flexibility and availability. It is also limited to businesses that handle outstanding invoices, excluding business-to-consumer companies.

Going Forward

In the end, invoice financing may offer a solid option for most businesses that frequently face cash shortages. As a business owner, you have control over which option works for you to promote your business growth. At Betterbanc, we are dedicated to helping you solve your immediate capital needs and deal with arising cash flow problems. Do not hesitate to contact us today.

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