Business Advice/Guide

Lending on Invoices vs. Assets

The situation: your business needs money. Maybe it’s to invest in something, or perhaps to buy new stock. Maybe it’s to cover expenses until you get paid by a customer.

The solution: lending. By borrowing what you need, you can pay it back later.

But what kind of lending should you get? 

Small business loans are relatively well understood, but lending based on your invoices is lesser-known and often much better suited.

Importance of finance for every business

Many business owners rely on finance to establish, run and grow their businesses. There are a myriad of costs that are involved with running a business, and it’s often not feasible for owners to pay for them all up front. 

Not only that, but loans can help to keep cash flowing in a business during periods where you’re waiting for work to come in, or for customers to pay invoices.

For these reasons, bank loans are extremely common. Loans have helped some of the world’s biggest businesses to finance their growth and achieve the remarkable success they have.

However, for small businesses, traditional loans are rigid, hard to get, and often not suited to the day-to-day cash needs of your business.

This is where invoice lending has many advantages.

Understanding the concept of invoice lending

Invoice lending, also known as invoice financing or cashflow finance, is a type of small business funding option that’s commonly used to promote positive business cashflow. Invoice financing can help cash flow by allowing businesses to get their invoices paid immediately, rather than waiting weeks or months for customers to pay them.

By using an invoice financing service rather than a bank, businesses can borrow the value of their invoices. You essentially sell your invoice, and repay the value once the customer pays the invoice. You get paid your invoices today.

The benefit of using invoice lending is it takes pressure off the business by giving it the money to use for business needs in the period of time it takes to receive payment for invoices. There are often a range of overheads that need to be paid in that time. 

For example, if a plumbing business completes work on a new house and invoices the customer, that customer may have four weeks to pay. They may be late in paying that invoice – as many customers often are – and in the meantime, the plumbing company needs to dip into its own bank account to cover its wages, rent, power and running costs. 

If the plumbing company doesn’t have the cash on hand to cover those costs, or it would rather not pay out of its own pocket, it can opt for invoice finance to get cash coming into the business and be more able to afford them.

Overview on asset-based lending

Asset-based lending is the traditional form of business loan. It’s where business owners borrow large amounts of cash and repay it in instalments over a long period of time.

In order to get a bank loan, businesses have to secure it against tangible assets. This means having enough collateral to show the bank it can recover the value of the lending if you’re unable to pay it back – hence why it’s called asset-based lending. 

Stock, property, equipment and machinery is commonly offered up to guarantee a loan. Small business owners often put their own homes on the line to get business loans too.

Asset-based lending usually has a minimum threshold of $100,000. This means businesses are unable to borrow less than this amount. It comes with interest and other administrative costs that must be repaid too.

For many small to medium sized businesses, many aspects of asset-based lending aren’t ideal. However, because it’s a better known form of finance, they can get trapped paying more than they should because they haven’t utilised cashflow finance. 

Lending on invoices vs assets: Pros and cons

There are a few different ways that invoice-based lending can be a better alternative finance to improve short term cash flow

  • Invoice-based lending comes in smaller denominations than asset-based lending. It doesn’t have a $100,000 minimum, so it’s more manageable and takes much less time to pay off. 
  • Rather than having to be secured against tangible assets, invoice-based lending is guaranteed against invoices.  
  • Invoice-based lending is quicker to get, as it doesn’t require thorough approval processes such as valuation of total assets. 
  • Flowing on from the previous point, many small to medium sized businesses find it hard to get a loan because they don’t have sufficient assets to secure it against. Invoice-based lending is available without the amount of scrutiny over your assets and liabilities. 
  • The cost of invoice-based lending when used properly can be much less than solely using asset-based finance. There is little to no interest, and services such as FundTap have no additional administrative fees.  
  • Bank loans can take years to pay off, which also adds to their costs. Invoice-based lending is repaid as soon as the customer pays back the invoice.

Is invoice-based lending right for your business?

Because it’s easier to get than asset-based lending, it can be tempting to see invoice finance as a last resort. However, using it proactively in the first instance is often enough to get cash flowing and cover the amount that’s needed.

If you need smaller amounts of lending, invoice-based finance is cheaper, quicker and more flexible. 

Many businesses will use a combination of invoice-based and asset-based lending to unlock the advantages of both. For example, if a business has a constant need for $100,000 but often requires up to $200,000, the best approach is an asset-based loan for $100,000 and utilise invoice-based lending to provide up to another $100,000 when needed. This assumes you have the assets to obtain the asset-based loan.

Similarly, the business may not have $200,000 in outstanding invoices to borrow against, so it needs at least some asset-based lending to meet it’s need. If the expenses that it’s aiming to cover are variable, it may be able to get asset-based lending to cover some of it, and invoice-based lending to cover the remainder when it’s needed. 

This is good cashflow management because it reduces the cost of lending by having a smaller loan, while doing enough invoice-based lending to ensure the business can pay its obligations.

Use FundTap to finance your invoices

FundTap is an invoice financing service that was specifically designed to meet the needs of small to medium sized businesses. It’s fast, cheap and flexible, allowing business owners to get the cashflow they need easily, without having to spend large amounts of time arranging it.

With fees starting from as low as 4% of the value of the invoice, FundTap is one of the cheapest invoice funding providers there is. There are also none of the establishment fees, admin or system fees that many other invoice finance providers charge.

You can set up an account without any paperwork and it takes as little as five minutes. From there, you can be approved and ready to go in just one hour.

FundTap is integrated into your online accounting software, so applying for funding is a simple case of selecting the invoice you want funding for and submitting it. With an account already set up, funds can be deposited into your account that same day.

FundTap also offers flexibility that others don’t. Where some services require businesses to use them for each and every invoice, FundTap businesses can select only the invoices they want funding for. If you don’t need invoice funding one month, simply don’t use it, and there’s no fee and no penalty.

Find out more about how FundTap compares to other invoice-based finance options, or check out a free demo today. 

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