It’s thought that 20% of small businesses fail in their first year of trading, while this ratio increases to 60% by year three.
Many of these failures are caused by working capital and cash flow issues, as startups can struggle to cope with gaps in earnings and sustain themselves while they establish a client base and steady workload.
Invoice financing can help in this respect. But what are the exact benefits of this practice? Let’s get into it!
Firstly - What is Invoice Financing?
In simple terms, invoice financing is a short-term borrowing option that requires firms to sell their accounts receivable to a third party lender.
There are two potential models in play here. The first is invoice financing, in which a third party will pay you a percentage of the total value of your accounts receivable when you raise them.
You can receive between 60% and 80% of the total value within 24 hours of the invoice being issued, creating a vital flow of capital while you wait for the client to settle their debt.
You can also leverage invoice factoring. In this case, you’ll simply sell your accounts receivable to banks or lenders, with these entities then responsible for chasing payments and settling these with your clients.
The Benefits of Invoice Finance - What You Need to Know
The question that remains, of course, is why should you consider invoice financing or factoring? Here are some of the practice’s key benefits:
- #1. Optimise Your Cash Flow in Real-Time: Regardless of which model you choose, you can receive some or all of your outstanding accounts receivable just as soon as the invoices have been raised. This ensures that you can optimise your cash flow in real-time, without being encumbered by potentially challenging 60 or 90-day payment terms. By utilizing efficient invoice software, you can streamline your invoicing process and further enhance the speed and accuracy of your cash flow management. This is a huge advantage and one that leaves you to focus solely on delivering timely and high-quality work (whatever form this takes!).
- #2. Retain Control and Minimise Debt: While other financing options exist for firms that struggle with their cash flow, many of these are long-term in their nature and may even reduce the control that you have within your business (especially when selling equity in exchange for cash). Make no mistake; invoice financing or factoring are short-term borrowing methods that don’t encumber the business, while they also ensure that you retain the full share of your company equity.
- #3. Optimise Your Working Capital: We’ve already touched on invoice financing can positively impact your cash flow. As a result of this, you can bank money ahead of time and use this to undertake more work or buy additional stock, creating a steady flow of working capital that can contribute to the completion of new business. Working capital may also be used to improve marketing and sales processes, helping you to grow your business from the outset.