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If you’ve recently launched a small business, then there is no doubt that you will have encountered your fair share of challenges thus far. Especially given the widespread uncertainty in the current global economic climate, your business may be experiencing issues with rising costs, shortages of staff, and disruption to supply chains. Whilst many of these issues are influenced by external factors which are often beyond what you can control, it is important to ensure that you are taking steps to keep your business’s cash flow moving. A potential cause for concern that you may currently be encountering is ensuring that your customers and clients are paying their invoices promptly. In some cases, delays to invoice payments can be a significant annoyance; in others, it can lead to a crippling loss of cash flow, which can have serious implications for your business and its success.

There are a number of strategies you might use to encourage your clients to pay promptly, as well as things you can do to reduce your exposure to this kind of risk. In the latter category, we find a practice called ‘invoice financing’. Below we take a look at what invoice financing involves, what different options there are available to you, and how it can benefit your business.

What is invoice financing?

Invoice financing involves obtaining an advance on the money being requested from a third-party lender. This means that you’ll get the money immediately, the moment the invoice is raised. Typically, the service provider will want to survey your premises and make you an offer according to the perceived profitability of your business.

Advantages of invoice financing

There are a number of substantial advantages to this form of financing, both for you and your business and for the lender themselves.

The first is that you won’t have to wait for invoices to be paid to start reinvesting the amount you’re billing. You’ll never be waiting potentially up to 30+ days for one bill to be settled before you can pay another.

Secondly, you’ll be able to grow the business much more quickly, because the wheels of your business will be turning that much faster. Because you’re getting the money immediately, you can create a positive spiral that will propel your business upwards. This earlier access to previously unavailable funds means that you may be able to enter into negotiations with your suppliers about receiving a discount for early repayments, allowing you to further increase your profit margins. As your business is then able to grow its turnover, invoice finance arrangements are also flexible and scalable to your business growth which will increase your access to immediate cash.

Unlike other forms of financing, you won’t need to raise equity. It’s your invoice that is being used as collateral, so your business assets don’t need to be put at risk, and this can provide you with more peace of mind because there is no need for you to provide additional security, this is all taken care of for you.

This form of financing also allows you to more easily deal with unexpected bills and other expenses. You don’t need to alter your plans to cope with unforeseen challenges.

Invoice Factoring vs Discounting

There are various options to consider when applying for invoice finance, which includes invoice factoring and invoice discounting.

Factoring involves the lender buying the debt for a portion of its total value and taking responsibility for the collection of the debt. While the business doesn’t get the entirety of the amount owed, they get at least something – and they don’t have the responsibility of chasing a debtor. However, in this case, the lender is responsible for collecting the debt owed to the business, and so this can involve direct contact between the lender and your customers, or at the very least the customer will be aware that your company’s sales ledger is being accessed by a third party lender, which could potentially have adverse effects on your company’s relationship with its clients, particularly in certain industries. Therefore, if you would like to retain more control over your debt recovery, then it may be worth considering invoice discounting.

Invoice discounting is something slightly different. It involves the lender providing a portion of the amount owed, and then the balance once the debt is fully settled. This helps to reduce the risk for both the lender and the business, as the business is able to retain full control of its sales ledger and thereby keeps the responsibility for chasing clients up for unpaid invoices.