When cash is held up in outstanding invoices, a business is more likely to face a hard time trying to balance current obligations. This is where invoice financing comes in. Invoice discounting or invoice financing refers to short-term borrowing aimed at improving a company’s cash flow. It involves the use of two popular methods i.e. asset-based financing and factoring. Asset-based financing involves securing accounts receivables of a business. Factoring, on the other hand, is where a company sells its invoices to a factoring finance company for instant payment. The payment provides a boost to finance business operations. It is often used by small and mid-sized enterprises.
Why invoice finance is key to a healthy business
- It improves your business profits
Invoice financing not only allows a business to pay their suppliers on time but also lets you order products and inputs in large quantities. This can help you qualify for quantity discounts. This method of financing also eliminates unnecessary bank charges while giving you a regular flow of cash. With a healthy bank balance, you can save on related bank charges and interests which translates to improved profit margins.
- It quickly releases locked cash to a business
Unpaid debts can bring business operations to a standstill. However, a proof of invoice from clients can warrant you quick cash. It breathes life into a seemingly stressed business. With access to quick cash, you can have peace of mind especially in cases of emergencies.
- It reduces debt collection time
The period taken to convert accounts receivables into liquid cash is referred to as the collection period. Invoice financing provides advance payment for customer invoices. Through invoice financing, you can reduce the waiting time at a small fee. You can get instant cash for up to 80% of all your receivables.
- Business relations remain unaffected
Invoice financing doesn’t affect the seller-buyer relationship. This is because the discounting company doesn’t have any contact with your customers or buyers. In fact, it is very confidential as customers won’t know that you have made borrowings on sales invoices. Additionally, as a business owner, you continue being in control of the receivables and you can even grow your sales in both cash and credit without bothering much on liquidity.
- No need to use an asset as collateral
In invoice financing, it is possible to obtain cash without pledging an asset as collateral. You only need to submit the invoices that customers are yet to pay for the transactions done. Only the accounts receivables are enough to act as collaterals. There is no movable or tangible asset to pledge.
Invoice financing is a great alternative to traditional bank loans and other types of borrowings. It provides a quick source of cash for businesses in times of emergencies. You don’t have to use any other collateral to get invoice finances apart from customer invoices. Alongside improving business profits, invoice financing enhances the relationship with customers and reduces debt collection time.