As the founder of a business, one of your biggest challenges will revolve around the consistency of cash flow into the business. Even in early development stages, supplies must often be replenished, purchases and services will need to be purchased, and even more importantly, payroll must be met on time, every pay date. Not having a fluid source of funds can stifle the growth and longevity of your business, but viable sources of funding for businesses are scarce or have highly competitive requirements. Business loans are nearly impossible to attain, and credit cards can only go but so far before they are maxed out. Even more so, the increased debt makes the pressure of needing cash flow more intense because that is an additional payment that must be made each month.
Invoice financing also referred to as “accounts receivable financing” or “invoice financing, is an innovative solution that can save your business from financial instability. It provides a much-needed way to keep the incoming flow of cash consistent by loaning money against unpaid invoices, which are used as collateral. This is a perfect solution for businesses who need money in between the influx of payments to keep the business progressing and the momentum at a steady pace.
Companies that offer invoice financing will finance as much as 85% of the balance on your unpaid invoices that you will receive in 24 to 48 hours, with the remaining 15% paid out to you at a later date. This allows you to have direct access to cash whenever it is needed. The lenders charge a percentage of the invoice total as their fee for issuing the loan, which is paid by instalments. This win-win solution can save your business from lack of funds, focus or accessibility to funds-but not without warnings. Invoice financing is not ideal for every type of business, but in order to understand why, you have to understand how it can save your business in the first place.
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Maintain Consistent Cash Flow
If everyone is expecting to be paid on Friday, and you know, you do not have the cash to cover it that can become an extremely stressful situation. First, your employees might quit, and even threaten to take legal action to receive earned wages if they are particularly disgruntled. Even if they are not, you still experience the disappointment of letting down the people who believe in your vision. They may not quit altogether, but the morale among your team will slowly dissipate until their confidence level in you follows suit.
The downward spiral of not having consistent cash flow will trickle into your ability to satisfy investors, establish the initial growth originally projected which can cause the project to become delayed or halted altogether. Cash flow is detrimental to the survival and continuation of a business, and with invoice financing, that consistent cash flow is no longer an issue or concern.
No More Wasted Time on Collecting Debts
One thing that can really stunt the growth of a business is the existence of unpaid invoices and the time wasted on collecting them. First, the fact that you have money owed to you that is not in your possession is a problem. You have already provided the product or service; you extended credit, which gave your customer or client time to pay you as agreed. However, when you have planned your bills and payroll around the due dates of your invoices, and they are not paid on time, everything else falls out of place. It takes a lot of time and focuses that should be applied towards the business, which is instead being forced to be applied towards finding solutions, making replacement payment arrangements, applying for short-term loans and explaining the situation to employees.
On the other hand, you either have to hire additional staff, or include the tasks as a part of your current staff’s responsibility in order to put forth at least the minimum amount of effort necessary to collect on the debts once you have settled everyone’s nerves about the cash shortage. That becomes an ongoing and time-consuming task that will cost you more money, in the long run, to pay for the new hire, or it will take away from the growth of your business because you will most likely need to pull away one of your key players on your team. In either case, your business suffers when your cash flow suffers. It is because of invoice financing, often contractually design to be a “non-recourse” agreement, once you finance an invoice, you never have to worry about collecting on that debt-ever. The financing company assumes the responsibility of collecting on that debt, so you are completely relieved of that responsibility. Not only do you get to save time and money from the process of collecting on debts, but also the non-existent cash flow generated by the unpaid invoices is solved.
Easy Access to Much Needed Funds
Even though you can find advertisements for small business loans online, any business founder knows just how difficult it can be to actually acquire business lines of credit. That is why invoice financing is so beneficial for businesses because it makes the process of accessing fund much easier and less restrictive.
Instead of relying on business and personal credit to qualify for funding, the operation of your business and its’ customers is more of the focal point for financing companies. Instead of being concerned with your ability to pay back the loan, invoice-financing lenders evaluate the creditworthiness of your customers from which the invoices are due. That is why most invoice financing companies prefer to do business with businesses that service companies and the government as opposed to individuals. Therefore, businesses who provide business-to-business services and products will find that the process of invoice financing and accessing funds are much easier than applying for a loan through a traditional lender.
Warnings to Beware of with Invoice Funding
Just from understanding that business-to-business, companies have an easier time being approved for invoice financing compared to businesses that cater directly to consumers. That is a clear indication that invoice funding is not for every founder, nor will it be applicable for all types of business. Aside from the type of business, you operate being an obstacle when acquiring this type of funding; there are also some cautions to keep in mind in the event you are seriously considering one.
The Costs Involved Are More than Conventional Loan Rates
Banking rates fluctuate, but they typically run at a lower rate than invoice financing. The annual interest rate of invoice financing is between 12% and 60%. That is on top of a 1%-5% service fee. The debt can surely increase with time, which means that the longer it takes you to repay the loan, the larger the final payoff will be. That is why founders must be sure that their payment cycles are short, and not to invoice too many invoices to keep some of the organic cash flow free from debt and interest.
Customers Can Feel Alienated
One significant drawback that is often experienced by founders is the backlash they get from customers who receive a collection call from the financing company. They will be either upset at the fact their information was shared with to a third party, or that they are now being nudged to pay their bill. In either case, this can result in strained relationships, even the loss of future business, so it is a consideration to make with careful thought.
Determining If Invoice Funding Is Right for Your Business
If your business operates with business-to-business clients, who mostly pay on time, then invoice financing will work very well, especially if your payments come in on a monthly, bi-monthly or 90-day cycle. Home health care agencies, marketing companies, PR firms and even graphic designers make great candidates for this type of funding. On the other hand, consumer-oriented businesses with long payment cycles and uneven cash flow will find more difficulty-obtaining invoice financing and are best advised to avoid them altogether.
Overall, if your business fits the criteria, invoice financing is the perfect solution to fix all of your concerns revolving around cash flow. Not only can invoice financing alleviate cash-related stress but also stress associated with operating a business and could even save it from being shut down before it has a chance to totally get up and running.
When it comes to choosing the best invoice financing services, the more choices you have, the better options you can find to better suit your business. Even more, you always want to ensure that you are doing business with reputable companies that will reduce the hassle and uncertainties that make the financing process stressful. After all, having cash flow problems is already stressful enough so the process of solving it should not be too. Finimpact is one the few invoice factoring companies that actually give you options, as they are a part of a network of leading industry lenders and they will match your business with the right lender. In addition, you no longer have do you have to have multiple windows or tabs open to actively compare rates, financing options, and lenders.
Finimpact provides a secure, reliable platform that will make sure your business gets the funding it needs to stay above the red.