Invoice Financing Tips for Small Businesses
by: Jeremy Garney on Wed, 8 Apr 2009 at: 10:17 AM Go to: Previous Article Next Article
In today's business world, every company would have liabilities in the form of creditors and assets in the form of debtors. If you are a business owner, your debts are recorded in your books as accounts receivables. The sum total of the value of your accounts receivables is the total debt owed to you by your debtors. You would bill each debtor the debt they owe you. And as long as these invoices are not paid, the amount therein is recorded under accounts receivables in your books. But although this figure represents your business assets, they cannot be used to finance anything. That's where Invoice Financing comes in.
Invoice financing is also called invoice factoring. In this form of financing, your business can turn its accounts receivables into cash by selling them to a factoring company. A factoring company is a company that provides working capital by taking over the debts of any company in exchange for cash. The factoring company usually advances a certain percent of the total debts to your company. Industry practice may be different from country to country but it would not be unusual to be able to turn 80% of your debts into cash this way.
Once you have entered into such an agreement with the factoring company, the factoring company now takes over the rights to collect the debt amount from your debtors. Thus your debtors would be informed to make payment to the factoring company instead of your company. So this works out to be a win-win situation for you and the factoring company.
There are many advantages of seeking invoice financing for your business. Among them are:
1. An improved cashflow for your business. Instead of waiting the traditional 30, 60 or 90 days for payment according to your credit terms, you can get vital cash for your business through a factoring company within a matter of a few days.
2. You have a more predictable and stable source of cash for your business. You know exactly how much you will be given by the factoring company, which would be, say 80% of your total invoices.
3. You now have a more reliable and predictable source of cash for your business. The exact amount you will be paid by the factoring company is known, which would be, say 80% of your total debts.
4. Invoice financing is much less tedious and stringent than applying for traditional financing like bank loans. To get a bank loan approved, you need to provide collateral, guarantors, have a track record and fulfill many other requirements. But all these are not required for invoice financing because your line of credit is directly tied to your debtors. The more debts you have, the greater the amount of financing you can get. Additionally, you cannot obtain more than the sum total of your debts. In that sense, there is no ambiguity for any party. That's why obtaining invoice financing is easier than traditional bank loans.
5. Invoice financing is a good way of raising cash for ongoing minor expenses. Wages, supplies, rental, loans, making daily expenses etc. are part and parcel of any business. Not being able to fulfill these smaller obligations can be a problem for your business.
In any case, invoice financing is not normally suited for capital expenses such as buying land or heavy machinery. It is better to seek other financing options for these major expenses.
About the Author
One company that specialises in helping businesses monetise their aged debts is Link Financial.
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