Invoice finance can seem confusing, is it factoring or could it be something you’ve totally overlooked?
The reality is that invoice finance and invoice factoring are both financing tools that offer funding based on the same asset, enabling you to access funds tied up in unpaid invoices.
There are critical differences between the two which you can learn more about in our previous article “Waddle’s Invoice Finance Is Not Invoice Factoring, Here’s Why”
When we’re talking invoice finance, we technically refer to an asset-based line of credit, established by extending a flexible line of credit against you outstanding receivables balance.
It’s important to understand that invoice finance is not a factoring solution, both from a legal and practical sense.
As your invoicing level increases or declines, your line of credit fluctuates up or down, with the lender not interfering with your invoices or customers, resulting in a fantastic financing tool that mimics a traditional bank overdraft.
There's also no need for property security or disclosure to your customers. This makes it a very attractive alternative to overdrafts or factoring products.
Below are three facts to help you understand how invoice finance can help your business:
Increased credit terms & discounts from suppliers
Selling B2B means offering credit terms especially if you’re growing.
Having the funds to carry extended terms and pay suppliers/expenses will almost always prevent you from taking on larger accounts unless you have the cash on hand to carry you through.
Establishing an invoice financing product means you can now safely offer terms knowing you can access cash owed to you once invoices are raised. As your business grows it’s likely your supplier purchases will increase, with increased demand comes increased volumes.
Invoice financing can strategically position you to negotiate volume or fast payment discounts with suppliers.
Let’s say you order $20,000 worth of goods and have invoice finance in place. You can have the goods delivered, shipped and invoiced within 5-7 days, finance the invoices and negotiate an early settlement discount of say 5%-10% (in some cases).
The real trick here is to offset these discounts on the cost of the financing, if you can structure this effectively the financing can almost cost you nothing and in some cases you could make a small margin.
Eliminates cash flow gaps for growth
Besides the obvious benefits listed above, business owners that opt-in to finance all of their invoices can effectively finance each invoice they raise to provide a steady predictable source of cash flow to the operations.
SMEs need to investigate the overall cost and impact to profit margins for financing invoices and compare this with the time value and opportunity benefits of receiving money upfront versus the overall costs of the financing.
Sometimes costs do not come into play if funds are being put towards revenue generating activities and sometimes it takes a closer look if the funds are being used specifically for operational purposes only.
Credit limit grows without additional security
With invoice finance, funding is based purely on the amount of invoices you generate, the more you grow, the more funds you can access.
If you compare this to a bank loan that is tied directly to the amount of equity you have available in a property asset, you can quickly ascertain that if growth outstrips the asset, then access to additional working capital can become a problem.
To put it simply, unlike a bank loan, invoice financiers treat your invoices as an asset. The difference being, each invoices varies in value and duration and has a collective value that can increase and decrease, allowing financing to grow in-line with your sales.
Looking for an alternative
to invoice factoring?
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