4. Invoice Financing
Invoice financing is something that many first-time SME owners haven’t heard of, but it can be a very useful way to free up some cash flow. In short, you get financing based upon invoices you have raised but not been paid for, in effect getting an advance. However, there are catches.
Invoice Financing – The Advantages
The big one: improved cash flow. Invoice financing releases funds tied up in invoices. Quick and easy to set up, invoice financing is relatively easy to qualify for as there is very little risk to the lender. You can also use this function to extend longer payment terms to customers without it affecting your business’ cash. Even better, the credit line is based on the value of your invoices, so can increase in line with turnover. Finally, there’s often no requirement for security, making this a good option for businesses with few or no assets.
Invoice Financing – The Disadvantages
Invoice finance is a very sharp tool for a very specific problem. It is designed to specifically address insufficient cash flow. If your customers pay on time and within reasonable terms, then this is unlikely to be worth it for you. Worse, invoice financing can be much more expensive than other forms of finance. It’s also only available on commercial invoices where the customer is another business. So if you sell products or services to the public, it won’t be available to you.
Another big issue is that your customers might be made aware that an invoice finance facility is in place. Some financing is structured with what’s called a ‘factoring provider,’ who are basically responsible for collecting payments on the original invoice. If someone that isn’t you suddenly turns up demanding payment, it could damage the relationship you have with those customers. A better option could be invoice discounting, which allows a business to retain responsibility for collecting payments, so the customer does not know the arrangement is in place.