More than 64 percent of B2B companies were impacted by overdue invoices last year according to Atradius research. Roughly one in five businesses has lost revenue as a result. Slightly more have had to correct their cash flow because of it. This is significant on its own, but bear in mind, payments don’t even need to be late to cause cash flow issues. A lull in business will make things sluggish and overly-generous payment terms which give customers 30, 60, or even 90 days to pay are major culprits, too.
These things are damaging to larger companies, but smaller companies don’t have the ability to absorb cash flow issues quite as well. It not only stops growth, but it can completely put a small business out of business for good. If your small business is sitting on a stack of unpaid invoices waiting for customers to pay, you can leverage them to get cash now.
Invoice Financing is a Loan Against Your Invoices
Business owners often consider approaching the banks, but either shy away after reading the criteria for business loans or get outright denied. It’s very difficult to get a loan unless you’ve been in business for a considerable amount of time and have established good credit. However, banks will sometimes have a bit more wiggle room when the business has an asset that can be leveraged as collateral. Invoices can be that collateral. Credit and years in business still matter, but to a lesser degree if they expect the invoices to be paid soon based upon your history.
Financing Gives You Cash that You Must Pay Back
Most invoice financing programs work like a credit card. The lender decides what your unpaid invoices are worth and advances you a portion of them. When your customers pay you, you pay the lender back. However, as the balance owed reduces, you’re generally able to take more out again.
Invoice Factoring is Selling Your Invoices
Many people hear the terms “invoice financing” and “invoice factoring” and consider them to be the same, but they’re really different things. Factoring involves selling your invoices to a third party. The factor then pays you and collects from your customers. Factoring companies won’t necessarily purchase all your invoices, but they will purchase the invoices of credit-worthy clients, which is also why your credit doesn’t matter as much.
Factoring Does Not Put You in Debt
After the sale, the factoring company funds you promptly. The factoring company now owns the invoices. There’s generally nothing to pay back because you’re not the one waiting on payments — the factoring company is. Moreover, the factoring company does its homework on your clients, so it knows in advance that your clients are likely to be good payers, and some, like Interstate Capital, will even let you know how much work you can do for any one client before it starts looking risky.
Invoice Financing May Be Better if Your Small Business is Established
Financing is one of the more cost-effective ways to go, but it doesn’t work for everyone. It’s still a loan, so lenders will be using all the same criteria they might be for a traditional loan or line of credit, though the requirements may be reduced a bit due to the collateral. It also starts a cycle of debt, which can be difficult for some small businesses to climb out from. With financing, your small business is on the hook if someone doesn’t pay the invoice.
Invoice Factoring May Be Better if Your Small Business is Less Established
Factoring makes it easier for more businesses to correct cash flow problems because it isn’t using the same criteria that traditional loans do. Lack of credit or even bad credit may not be an issue at all. Factoring companies also help small businesses minimize their risk by checking your clients’ credit before you begin work.