Financing small businesses is a constant challenge. Getting the business up and running is one thing, but it doesn’t end there.
You have to pay for all sorts of costs and expenses along the way, as well as continually invest back into the business by purchasing stock, equipment and other things that help you to grow.
The problem is made much worse when you’ve got creditors that don’t pay their invoices on time. It’s inevitable that this will happen, and in businesses that don’t have large bank accounts, it can be a serious issue.
Invoice financing is a great way to take the pressure off in these situations.
Overview on invoice financing
Invoice financing goes by a few different names, including invoice discounting, invoice factoring and invoice funding.
Whatever you want to call it, it’s a way of turning unpaid invoices into cash. Invoice financing services essentially purchase invoices from you as soon as you send them.
Rather than waiting weeks, or even months, to get invoices paid, it helps to promote positive cashflow in your business immediately for things like expenses, purchasing stock or investment back into the business.
How does invoice financing work?
Invoice financing works by setting up an account with a dedicated invoice funding service. Once you’ve done that, you can use that service to buy your invoices off you as soon as they’re sent.
The most efficient invoice financiers can have money in your account that very same day. Once your customer pays the invoice, you repay the invoice funding amount back to the invoice finance service, plus a small fee.
This gives you the advantage of being able to pay bills and make investments in a timely manner, without having to wait until your invoices are paid. It removes much of the stress and financial pressure that comes when customers are slow to pay invoices too.
This is perhaps one of the reasons why invoice financing is one of the growing trends among businesses today.
Invoice financing is well suited to small to medium sized businesses, as a quick form of business financing. With FundTap, it’s also extremely flexible.
Businesses can select which invoices you want paid – other providers require businesses to use invoice financing for all invoices. FundTap helps to keep the cost of invoice financing down, so you only pay for it when you really need it.
Factoring for professional services
Invoice factoring is particularly well suited for professional service businesses. It’s common to see invoice financing for trade and construction, wholesale and distribution, manufacturing and processing and many other professional services.
These sectors typically invoice for their work, and commonly come up against cash flow issues that stem from invoicing. In businesses with particularly long payment terms, it can take months until you’re paid for a piece of work. In the meantime, you have to pay staff, rent and other overheads.
Often, invoice factoring providers will advance 80-90% of the value of the invoice to the business, and pay the remainder once the client has paid their balance. With FundTap, you’re paid the total value of the invoice in one go.
Importance of factoring for the professional services industry
Factoring is a growing form of business lending that has many advantages over getting a small business loan – more on that in a moment.
Cashflow is critical in all businesses, but professional services are particularly vulnerable to the effects of poor cash flow because their income is predominantly through invoices.
82% of small businesses fail because of poor cash flow. Invoice financing is an extremely useful measure to keep money coming into a business so you can pay bills and focus on the important things – not chasing creditors for overdue invoices.
Where factoring really comes into its own is in allowing businesses to promote positive cash flow without carrying risky liabilities. Because the money you’re loaned is based on your invoices, it’s well within your means to pay it back quickly. In fact, once your customers pay your invoice, you repay your debt.
At the same time, from the invoice finance service’s perspective, they’re comfortable lending you the amount of the invoice because it’s for a service that’s already been performed. That money is going to be coming into your business. It’s not based on forecasts or projections – it’s already happened.
What makes professional service factoring different from traditional bank financing?
Invoice financing differs from small business loans in a range of different ways:
- With bank loans, often the minimum borrowing amount is $100,000. With invoice financing, you can borrow any amount you invoice for.
- Bank loans can take weeks to approve and transfer businesses money, but once you have an account set up with an invoice discounting company, you can get funding in a matter of hours.
- Banks require considerable documentation and credit checking to approve a loan, which time-poor business owners need to collate. Invoice financing is available with much less effort – FundTap accounts can be approved within one hour.
- Where bank loans incur regular interest, service and other fees, invoice funding is much cheaper. With FundTap, setting up an account is completely free, and fees start from as little as 4% of the value of the invoice.
Tips for picking a good invoice financer for your professional business
There are many providers that supply invoice financing for small businesses, so how do you know which is best for yours?
There are a few key things to consider when picking your invoice funding service.
- Ease of use. Is it easy to set up an account? Is it easy to apply for funding and get it paid into your account? Business owners often have a lot on their plates already, so the quicker and simpler the invoice financing process, the better.
- Cost. Plainly, the cheaper the invoice financing service, the easier it is to absorb. Be careful to know and understand all additional fees and costs when comparing. Many providers will charge a whole range of fees.
- Flexibility. This is related to cost, where many providers require businesses to use invoice financing on all their invoices. It’s more affordable and manageable if you can use it only when you need it without penalty.
- Time. How long will it take to get paid once you apply for funding?
- Customer relationships. Would you rather manage invoice payments from your customers, or have your invoice finance service do it for you? Business owners may prefer to have more control over their dealings with customers, rather than a third party communicating with customers on their behalf.
Benefits of invoice financing with Fundtap
FundTap has been specifically designed to overcome many of the traditional issues of business lending and small business invoice factoring.
For example, see how FundTap approaches the important features of invoice financing above:
- Ease of use. FundTap integrates fully into your online accounting software. To apply for funding, simply select your invoice in your accounting dashboard and submit it.
- Cost. FundTap only ever charging a single transparent fee and only ever for funding you receive. No establishment fees, admin fees, ongoing fees etc. With fees from as little as 4% of the value of the invoice, FundTap is one of the most affordable invoice funding services.
- Flexibility. FundTap allows businesses to select only the invoices they want to have funded, without penalty. If you don’t need invoice funding one month, you don’t use it and you don’t pay for it..
- Time. Setting up a FundTap account is paperless, and takes just five minutes. Funding is approved within an hour of creating an account, and you can be paid within minutes of applying for funding.
- Customer relationships. You retain control of customer relationships. They still pay invoices into your account, so they don’t know you’re getting invoice funding. Once they’ve paid, the value of the funding is immediately transferred to FundTap, so you don’t have to do anything.
FundTap is proven to unlock enormous benefits for businesses. In the last two years, FundTap customers have increased their turnover by 54%.
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