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Understanding Invoice Finance

Trading Invoices And Securing Investment

For business owners looking to gain cash flow finance, there are many more options available today than there were in the past.

Before, the only option was to approach a bank about a loan. Small businesses with limited credit history and no assets to secure borrowing against inevitably struggled to satisfy credit requirements.

Now, there are a range of flexible and accessible forms of funding for small businesses and startups. One that’s proving popular is invoice trading.

TL; DR

Invoice trading is a flexible, reliable option for businesses wanting to increase cash flow. It makes it easier to get finance faster and reduces the cost of borrowing.

Invoice Trading: an alternative financing solution

Invoice trading is known by a few different names, including invoice financing, invoice discounting and invoice factoring.

Read more: Understanding invoice financing

The process involves trading invoices that are yet to be paid for a short term loan, usually to boost cash flow. Finance can be arranged through a specialist trade invoice financing company, or even to private individuals through an online community of lenders.

Through an invoice trading platform, companies can connect with lenders, using unpaid invoices as assets or collateral. This lowers the barriers to entry and makes it an accessible form of peer-to-peer business lending.

Which types of companies are suitable to use invoice trading?

Companies of all shapes and sizes are able to use invoice trading. The only strict requirement is that the business earns revenue through invoices.

One common thread among businesses that use invoice trading is the need to generate cash flow. Whether it’s to pay bills, purchase stock or invest in growth, businesses can use invoice trading to increase cash flow quickly and effectively.

As we’ve mentioned, invoice trading is particularly popular among newer, smaller businesses that are less able to secure more traditional forms of lending.

In saying that, larger companies also use invoice trading to lower the costs of borrowing. For example, a company may need to borrow $150,000 to improve short term cash flow, but it may also have $30,000 in invoices yet to be paid.

Rather than taking out a $150,000 bank loan, it can borrow $120,000 and use invoice trading for the remaining $30,000. The $30,000 is quickly repaid as soon as customers pay their invoices, and the company is left with less debt and less interest to pay, reducing the long term cost of its borrowing.

Understanding the working of invoice trading

So how does invoice trading work?

An invoice trading platform connects investors to companies that are looking for short term cash flow loans. When business accounts are approved, they can submit an invoice for funding.

Once the invoice is verified, it’s posted on the platform and available for any investor to consider. Investors can also see information about the company, including credit scoring.

If an investor decides to fund the business, they lend the value of the invoice. How much money they loan to the business depends on how the invoice trading platform works. It can be the full invoice amount, but often it’s slightly less – up to 90% of the invoice total.

The business can then use the lending however it needs to, like any form of borrowing.

When the customer pays the invoice, the company repays the debt to the invoice trading platform with an additional fee that represents the return for the investor. The invoice trading provider also takes an administration fee.

Invoice trading product types

Under the umbrella of invoice trading, there are different types of business finance.

They are largely similar, and provide the same level of increased cash flow on investment, but do have subtle differences that can be meaningful for the businesses that use them.

Invoice factoring

Invoice factoring typically works by selling the invoice rather than borrowing based on the invoice. It may sound similar, but it’s where two of the big risks associated with invoice factoring come into play.

Because the company sells its invoice, the purchaser takes on responsibility for collections. They’ll chase up overdue invoices, and the way they pursue late paying customers may have an impact on the customer’s relationship with the business.

The second risk is that businesses need to tell customers to change the bank account they pay the invoice into. As well as creating more admin work, it makes the business’ financing public and allows customers to come to their own conclusions around why the business is using invoice factoring.

Invoice financing

With invoice financing, the business retains the responsibility for collecting payment for the invoice.

Chasing late invoices isn’t ideal for anyone – it takes time and energy that’s better spent on other things. However, it allows the business to remain in control of its customer relationships without introducing a third party, as well as not having to tell customers that it’s trading invoices to boost cash flow.

Pros of using invoice trading

There are a range of significant benefits of invoice funding for businesses:

  • It’s easier to get finance. Invoices are seen as reliable forms of collateral, so lenders don’t require the same exhaustive levels of credit checking or to have large assets provide security.
  • It’s fast. Where bank loans can take weeks, or even months, to have approved, setting up an invoice trading account is quick, and businesses can be approved within days. Invoice finance is often transferred within 24 hours of submitting an invoice, making it much faster than other lending.
  • It improves business cash flow. This is the whole point of invoice trading – by increasing the cash a business has available to cover its overheads or invest in its growth.
  • It reduces the cost of borrowing. As we’ve mentioned above, invoice trading reduces the need for other forms of borrowing. This means businesses pay less interest and can pay off their debt faster.
  • It’s quick to repay. Invoice trading debt is a form of short term borrowing, so it means businesses aren’t carrying long term liabilities on their books. The borrowing is repaid as soon as the customer pays the invoice. Repayment can even be automated when the invoice is paid, which saves time and ensures debt is cleared promptly.
  • It’s flexible. One of the great advantages of invoice trading is it allows businesses to remain in control of which invoices they get financed. With many invoice finance providers, businesses are required to get funding for all of their invoices.

This drives the cost of borrowing up, as they pay a fee on every invoice, reduces the benefit it provides, and can even create a reliance on invoice finance.

With invoice trading, businesses have the flexibility to decide when they need it and only submit an invoice for financing when they want to increase cash flow. However, some invoice trading platforms may still charge a regular account fee, even if you’re not actively using it.

Invoice trading with FundTap

FundTap is designed to make invoice trading easy. It was made with time-poor business owners in mind, so it’s quick, paperless and flexible to your cash flow needs.

FundTap takes on the invoice finance broker role, which mitigates one of the big disadvantages of invoice trading – that investors may not want to finance a company’s invoices.

Creating an account with FundTap takes just five minutes, and you can be approved for credit that very day.

There are no membership or admin fees, which makes FundTap perfect for businesses that don’t always need invoice finance. You can have it set up and ready to go, with no obligation to use it, and no costs if you don’t. But, when you need to boost cash flow, it’s there. This is a key advantage of FundTap over other invoice financing services.

Getting an invoice financed is incredibly fast, and the money can be in your account the same day you apply for it. FundTap links to your online accounting software, and you can submit an invoice for finance with the click of a button.

Repayment is easy too – again, because it’s integrated into your accounting software and automatically direct debits your account. This reduces the chance of late fees and allows business owners to focus on growing their business.

Find out more about how FundTap works, or check out a free demo today.

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