When a business is in need of generating revenue, there are several ways to leverage money from future payments. If you’re tired of chasing after clients for payment or need an immediate cash flow mix for your business, then you should consider invoice financing; when a third party buys a company’s unpaid invoices or lends money to the business against the invoice value. Companies can use invoice finance to finance slow-paying accounts receivables, making it the perfect finance tool if tardy invoice payments are hindering your business growth.
Invoice factoring and Invoice discounting are the two major types of invoice financing.
Factoring refers to when a business sells their accounts receivable to an invoice financier, who then takes on the responsibility of collecting debts owed by a business’s customers. This means that your customers are aware you are using this form of funding systems.
With invoice discounting, invoice financiers don’t manage your sales ledger; neither do they collect debts on your behalf. Instead, the invoice financier lends you money against unpaid invoices. You’re still responsible for collecting debts from your customers, and the money you collect goes towards clearing the loan. You’ll also have to give a pre-agreed fee for this service.
Invoice finance can be a beneficial funding systems to your business. For instance:
- It improves your cash flow.
- It gives you the opportunity to fund the growth of your business without turning to extra liabilities or debt.
- You get access to specialist expertise. Before making a funding decision, invoice financiers have to take into account the business’s entire financial picture.
- It’s a form of financing that grows with you.
- It’s much more flexible compared to business loans or overdrafts.
- It doesn’t require extensive credit history.
- It’s a secure form of finance.
- You are free to use the cash for whatever purpose you see fit.
As a business you should use invoice financing if:
- Your business sales are growing, and you need continuous cash flow to keep pace.
- You are using trade credit sales and you want to be in control of customer credit without an increased workload.
- Your business turnover is projected to grow over £500k.
- You could be using the money tied up in the sales ledger to grow your business.
- You want your working capital needs to be funded by the sales ledger.
Choosing the right type of invoice financing depends on your needs as well as the size and financial strength of the business.
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