Cash flow is a critical component of business, often being the determining factor between success and failure. A positive cashflow is necessary for everyday business such as buying inventory and paying bills, yet approximately half of Australian companies breakeven or have a negative cashflow over a period of one month.
Despite the best intentions of business owners, most companies will face cash flow problems at some stage in their existence. Whether it’s due to an unexpected drop in turnover or clients dragging their feet with their payment of invoices, negative cash flow can be extremely stressful.
This is where invoice financing comes in. Rather than wait for the money to trickle into your account as clients pay their invoices, invoice finance companies will pay up to 95% of the invoice amount as soon as it has been approved. When the client pays the invoice, you’ll receive the remainder of the invoice amount, minus the fees you’re required to pay to the financial company. This means you’ll have the money available to spend on what you need when you need it, rather than seeing what you can go without due to poor cash flow.
Benefits of Invoice Financing
There are many benefits associated with invoice financing and it certainly goes a long way in reducing the stress associated with cash flow. Some of the advantages include:
1. No Need for Extra Long-Term Debt
Many businesses with cash flow problems face a major dilemma: reduce expenses/ miss due dates on bills or borrow more money. Anybody who has faced financial difficulties knows that the last thing you want to be doing is increasing your debt. Invoice financing provides an effective alternative to this difficult decision. A business can borrow money that will help them to continue running their business, but without the long-term commitment. All debts will be paid off quickly as invoices are paid.
2. Money is Available Quickly
Money becomes available for use very quickly when you set up invoice financing. There is no lengthy approval process that may prevent you from getting access to funds for weeks. Instead, you will be able to access cash almost instantly, invoice finance helping you to resolve cash flow problems before they get out of hand.
3. Flexibility With How Much Money You Need
Most modern invoice financing companies allow you to choose how much credit you need. It is up to you to determine the percentage value of invoices that you want to receive upfront to keep things running smoothly.
4. Repayments are Only due When the Money is in
Unlike bank loans and credit cards that require repayments to be made on a specific day, repayments for invoice financing is typically only required when an invoice has been paid. This means you won’t have to pay anything until your client pays an invoice, creating a much more convenient way to manage cash flow.
5. Makes it Easier to take on Big Projects
Sometimes it can be difficult to commit to big projects, especially if they are conducted over a long period of time and the business will be expected to carry large parts of the cost for certain periods. Invoice financing reduces the stress with these types of projects as you will receive funds quickly. Most of the money will be available for you to use throughout the project, rather than waiting for the invoices to be paid.
Things to Consider when Choosing an Invoice Finance Company
When choosing a cash flow finance company, it’s worth obtaining information on the following areas so that you are completely informed before entering into an arrangement.
Fees are an important consideration when engaging any service and you should always checkthose associated with invoice financing. You want to know how much money you will owe for each transaction.
- Finance Model
Seek clarity on the financial model used by the invoice finance company. Do they offer payment plans, invoice factoring or something else entirely? This is vital information as it will impact the amount of money that you can borrow.
- Relationship Management
Find out who will be responsible for chasing up unpaid invoices. Introducing a third party to collect your debts may or may not be a suitable option for your company. It can be a good way to take something off your plate but If your business relies on establishing strong, long-term relationships with these people, you may choose to chase up the invoices yourself. Discuss with the financial provider to agree on the most effective method.
If you are struggling with cash flow invoice financing is a great solution that can help your business to continue operating as normal, even when you are waiting for invoices to be paid.