When you’re running a business, cash flow is a constant juggle. The good months are great; there’s plenty of money coming in to cover expenses and outgoings, and it almost feels like things take care of themselves.
Then you have a quiet month, and you’re digging into your bank account or hastily arranging some form of finance so you have enough money to pay your staff.
All businesses are different, but they all face cash flow issues at some point or another.
This article is everything you need to know about one of the best, most affordable ways to improve business cash flow – invoice lending.
Invoice lending is a great way to promote cash flow by replicating the effect of customers paying their invoices straight away. FundTap allows businesses to have a cash flow safety net that doesn’t cost you anything but can provide funding to boost cash flow within hours of applying for it.
Introduction to invoice financing
Invoice lending goes by a few different names: invoice financing, invoice factoring, invoice discounting, accounts receivable financing… there are some minor differences between some of the techniques, but they’re all based on the same premise.
Specialist invoice lenders such as FundTap help with business cash flow by lending based on the value of invoices. This creates the effect of customers paying invoices straight away – often it can take a month or more for customers to pay, which creates pressure on cash flow when businesses have to dig into their own pockets to cover expenses and overheads.
Invoice financing differs from other forms of bank lending in that it’s easier to get credit, as loans are secured against invoices rather than assets. The debt is repaid much faster, which makes it more affordable, and it’s much more flexible.
These considerable advantages make understanding invoice financing well worthwhile for small businesses in particular.
Invoice financing product types
Invoice factoring involves selling unpaid invoices to a factoring service. Businesses receive around 80% of the value of the invoice up front, with the other 20% (minus a fee) paid when the customer pays the invoice.
Invoice discounting works in a similar way, but the invoice is used as collateral for the lending. You’re still responsible for managing accounts and collecting accounts receivable.
Differences between invoice factoring and invoice discounting
When weighing up whether to use invoice factoring or invoice discounting, there are two key differences to be aware of. Both of these differences come from the way factoring companies take on responsibility for collecting payment of invoices.
1- With invoice factoring, your customers don’t pay invoices into your bank account, they pay the factoring company. You’ll need to change the bank account on your invoices, which means contacting customers to ensure they’re aware of the change.
Customers will often know you’re using invoice factoring as a form of finance, and may draw their own conclusions about why.
2- Invoice factoring companies take on responsibility for chasing any unpaid or overdue invoices. They will contact late-paying customers about your invoices, and these communications may impact your working relationship without you knowing about them.
Understanding the process of invoice financing
So how does invoice based lending actually work?
With FundTap, customers can create an account in five minutes and be approved for lending the same day. There isn’t a need for the same level of in-depth credit checking as with conventional lending because invoices serve as collateral, not assets.
This is a key difference between invoice finance and asset based lending, and one that makes invoice lending much more suited to smaller businesses.
FundTap links to your online accounting software, and it provides a high degree of flexibility that other providers don’t. Where other invoice lenders require customers to use them for all invoices, FundTap customers have the flexibility to use invoice finance as you wish. There are no fees when you don’t use it, which makes invoice financing with FundTap a great cash flow safety net for when you need it, while also keeping costs down.
To get invoice finance, simply go into your FundTap account and submit an invoice for finance. Because you’re already pre-approved for borrowing, you can have the funds in your account the same day.
Repaying the borrowing is easy too. Again, because FundTap is linked to your accounting software, it can detect when customers pay their invoices. On the due date a direct debit will occur. There’s no need for manual transfers – it’s all taken care of. You even get advanced notice and so can change the direct debit date if your customer pays you late.
As well as being more affordable and flexible than other providers, FundTap enables businesses to grow like no other. In the last two years, the average FundTap customer has grown their revenue by 54%.
When should your company use invoice financing?
Invoice lending works well on its own, or on top of other lending. Because cash flow needs fluctuate, invoice financing allows businesses to reduce their level of other, more expensive borrowing, and top up their debt as they need it.
You won’t need to borrow as much from the bank, and you’ll be able to control your overall level of debt for the times when you need it to generate cash flow.
There are a range of instances and business costs that factoring can help with:
To pay suppliers
Wholesale businesses often come under cash flow pressure because they need to pay suppliers up front, but they invoice their own customers. This creates a gap between purchasing goods and getting paid for them.
During that time, wholesalers have a range of expenses and overheads they need to pay for. Once they’ve done that, if customers still haven’t paid invoices, there may not be much leftover to purchase more goods with.
Invoice finance replicates the effect of customers paying invoices promptly, which allows businesses to continue to purchase inventory that ultimately enables you to make a profit.
To keep working with valuable customers
Large customers often insist on longer payment terms, which means they don’t pay your invoices as often. In these times, you’ll have to have the cash on hand to cover all your outgoings.
Invoice finance gives you the ability to cover everything you need to without having to turn down lucrative opportunities.
To take advantage of an opportunity
Growing a business requires investment, and there are often times when you’ll want to capitalise on a significant opportunity that has huge potential.
It may be developing a new product line, expanding into a new market or purchasing a new piece of equipment that will help you grow. Whatever it is, you need to be able to afford to do it, while also still covering all your regular outgoings.
With invoice finance pre-approved, businesses are able to act quickly to capitalise on opportunities as they arise.
Pros and cons: Important things to know about invoice financing
So we know how invoice finance and asset based lending are different, but what about specific advantages and disadvantages?
Advantages of invoice based lending include:
- Decreasing other borrowing. As we’ve mentioned, invoice financing works alongside other borrowing to allow businesses to top up their levels of debt as needed. Rather than carrying large amounts of debt just to service the times it’s needed, businesses can borrow a smaller base amount, and get access to extra funding through invoice finance only when it’s required.
- Cash flow. Invoice financing promotes positive cash flow by replicating the impact of customers paying invoices straight away.
- Making you more competitive. By using invoice financing to boost cash flow, you can offer extended payment terms to customers, which makes you more competitive.
- Ability to grow. As we’ve mentioned, the average FundTap customer has grown their turnover by 54% in the last two years.
- It preserves customer relationships. By retaining control of customer relationships, you don’t risk having a third party impacting your dealings together.
- Easier access to finance. Banks often have large minimum lending limits of $100,000 or more, which requires thorough credit checking. Invoice finance lets businesses borrow in smaller amounts without requiring large collateral.
- Flexibility and assurance. Again, FundTap makes invoice financing available as you need it. Once you’re approved for funding, you’ll have a back-up option to stimulate cash flow whenever you need it.
Disadvantages of invoice financing include:
- It’s still borrowing. Debt is debt, regardless of the form it takes. Fortunately, invoice financing is quick to be repaid, so it’s not a long term liability on your balance sheet.
- Expense. FundTap rates start from 4% of the value of the invoice. This often works out higher than interest rates, but because it’s paid back faster than a loan, it can still work out cheaper.
- Limited financing. Businesses can only borrow the value of invoices, so it isn’t ideal if you need to borrow large amounts.
- You still chase unpaid invoices. If you’re looking to get out of having to chase up late-paying customers, invoice financing can’t help. However, this does mean no-one else impacts your relationships with your customers.
Fund your business wisely with Fundtap invoice financing
As you can see, one of FundTap’s great advantages is it’s easy to set up so it’s available when you need it.
Creating an account is free and easy, and there are none of the administrative, system or membership fees that other invoice financing providers have. It literally costs you nothing until you use it.
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