Factoring: Financing for your Small Business

One of the major setbacks that small businesses face is lack of funding. The cash flow is further strained by unpaid invoices. With the strict procedures and long application process for a bank loan, most of them are left looking for alternatives. Invoice factoring is one of those alternatives.

What is invoice factoring?

While it is not a loan per say, it is the best way for small businesses to secure funds. Invoice factoring is where a business owner sells his unpaid invoices to a third party, usually a factoring company, at a discount, in exchange for a tidy sum of money. A discount rate is charged based on various factors like the sales volume, invoice amount and the customer’s credit worthiness ad deducted from the amount payable. The factoring company usually get their money back when all the invoices are paid up.

There are 2 common types of invoice factoring:
Recourse factoring– this is where the small business only sells the invoices to a factor. Should the debtors fail to pay uncollected invoices; the business will have to buy them back.
Non-recourse factoring– for this type of factoring, the lender assumes all liability for the uncollected invoices. This is the most preferred by small business owners.
Some main features of invoice factoring include a short period of between 3 to 6 months, discount rates and due diligence by the lender to determine creditworthiness.

Benefits of factoring for small businesses

Some of the reasons why invoice factoring is very popular among business owners include. Improved cash flow- through this mode of financing, small businesses manages to retain their loyal customers and still get funds. This helps in growing the business.
High rates of approval- unlike other sources of financing, invoice factoring does not have strict qualifications. This makes it the best options for small business owners with bad credit or a business with limited credit history. The only thing the factoring company looks at are related to the invoices.
No collateral required- invoice factoring is a type of unsecured financing. This means that small business don’t have to put out their assets as collateral.
Fast source of funding- it provides immediate capital that can be used to cover funding gaps and meet short term business obligations.

Small businesses, especially start-ups, rarely have a credit history or assets to put up as collateral. This rules out most methods of financing like traditional bank loans. Despite being a bit expensive, invoice factoring remains to be one of the best ways to finance a small business.

Collecting Unpaid Invoices the Easy Way

Collecting payments for the invoices that are generated for the clients should not be purported but instead be a routine, comfortable, and streamlined process. Unfortunately, regardless of how professionally you can manage all your debt collection, things at times may not happen the way you had planned. There comes a time when your clients will not comply and fail to make their payment on time.

For some reason reasons, you will find some of your clients saying that they’ll not pay heed and refuse to pay or some pay lately. How do you deal with such kind of clients? Well, it can be quite challenging to withstand such pressure in a serious business. For these types of clients, you need to have a good strategy for collecting your payments. But if you find that despite the effort to put things in order and still goes out of your hands, it will be necessary to seek help from debt collection attorney to help and advice you in a possible manner.

It easy to see that the unpaid invoices are not just hassling as some may think. You need to develop a good strategy to make sure that you collect them to avoid hindering the path of the progress. Don’t just make an assumption but understand the repercussion that poor strategy can have on your invoices. For example, the unpaid invoices will directly interfere with your business cash flow finance, and hence you will fail to keep it operational. Therefore, in a nutshell, they are of great concern and need immediate attention.

When you become smart enough, it would be straightforward to run your business without any inconvenience. The first step you need to take while collecting the unpaid invoices is to make polite follow-ups. Don’t just rush to any conclusion and start pressurizing or threatening to comply on the outstanding invoices. Instead, be patient and follow a workable systematic procedure.

Know that clients are essential and play a key role in thriving of your business. So when a client needs some time clear the unpaid invoice, give them if possible. Also if you would want them to pay extra cash as a penalty, engage them. Any genuine client can’t decline to pay the penalty. However, take caution not to prolong the unpaid invoices. When you still have pending issues with invoices that are more that are three months due, think of other better strategies as an alternative. If you wished to take legal action, you would need to find help from the debt collection attorney.

Therefore, putting these strategies in place will ensure that invoicing won’t be a treat to the cash flow finance and the existence of your business. The fact remains that unpaid invoices bring inconvenience irrespective of the size of your business.

 

Everything you need to know about Invoice Finance

There are a few benefits that can be picked up when a company chooses to invoice finance. A business that deals in the sale of products or services to different businesses will receive the advantage of enhanced cash flow by utilizing an invoice finance service.

What Does Invoice Finance Means?

Essentially, to invoice finance means to sell or assign your outstanding invoices to an cash flow finance company. This company, as a rule, will give you instant access to a percentage of the total amount of the unpaid invoices assigned to them, normally from 70-90% of the value of approved invoices. By and large, they may likewise assume liability for invoicing, chasing and collecting owed invoices and additionally acknowledge a percentage of the loss on unpaid invoices.

Benefits of Invoice Finance 

Cash Flow Increase

Approaching these funds significantly increment the cash flow inside your company. Cash on hand for expanded production, savings by a method for discounts on company expenses, decrease or even elimination of costs of doing business, and enhanced open doors for business loans.

More Sales 

By utilizing an invoice finance service there are no waiting 30-45 days for individuals who pay on time and much longer for late payments on invoices. That cash on hand can be more promptly available for production, creating an immediate availability for more sales.

The advantage of Discounted Payments 

Another zone the correct business can increase more prominent cash flow from utilizing invoice finance is in taking advantage of discounted payments of operational expense. Many companies offer discounts of as much as 10% if their invoices are paid on receipt or inside a specific time frame.

Better Terms From Suppliers 

With invoice finance, you have cash on hand to pay your bills sooner, as opposed to holding up until the point that your customer pays you for your item or service. Expanded cash flow likewise builds your companies buy power, improving it conceivable to negotiate terms or discounts from providers. The savings in these two areas alone will, by and large, outweigh the charge from the invoice finance service.

Different Benefits

There is a different operational expense that can be reduced or even eliminated when utilizing invoice finance, for instance, administration costs, stationery, and office hardware. While including the cost of employing an accounting clerk, their salary as well as company benefits, it’s anything but difficult to see some extraordinary advantages to utilizing an invoice finance service.

Invoice finance can be especially helpful to a business in the start-up phase. Most lending institutions have strict rules on lending to ‘new businesses’. A bank or moneylender will just think about a small bit of outstanding (unpaid) invoices owed, frequently just 40% of the total amount of outstanding invoices, while administering a business advance. By invoice financing, your record indicates cash on hand instead of a large amount tied up in outstanding invoices.

Disadvantages of Invoice Finance

There are a few disadvantages to utilizing an invoice finance service. The products or service your company supplies can hugely affect whether your company should utilize invoice finance. Businesses giving recurring services or item arranges are great candidates, while invoices for one-time requests may think that its difficult to acquire this sort of funding.

These companies want to know the debtor and their reputation in paying obligations previously tolerating invoices owed by that debtor. Another disadvantage would be if the markup sale cost of the products or service provided was not exactly the amount of the invoice finance charge.

For the correct business consolidating the enhanced cash flow with a sensible net revenue alongside expanded sales arranges the business is in a situation to expand and the expense to invoice finance can without much of a stretch be caught up in expanded profitability.

How Debtor Finance Can Shape Your Business

Companies can not always finance themselves exclusively through equity . A debt financing , ie debt, which flows in from the outside, for example through loans, represents a good solution for many companies.

The benefits of additional leverage are undeniable: increased liquidity enables companies to invest more, generate higher profits, and become more and more attractive to investors.
However, the key to good debt financing is the negotiation of good conditions. Excessive interest payments reverse the profits. For investors, leverage can not be assessed as beneficial or disadvantageous for companies.

Debt financing: advantages through increased liquidity and Co.
A (partial) debt financing is useful and advisable for many companies. An example: the medium-sized software company XBase urgently needs new capital for further investments, but does not want to finance these innovations through the company’s equity. External investors (such as a bank) can step in with a cheap loan and provide fresh capital to the company.
This brings with it the following advantages for the company XBase:

1. The credit institution does not have the right to co-determine with XBase, but is only relevant for the provision of the capital.
2. The increased liquidity of the company leads to further investments, the financial leeway of XBase increase.
3. If the debt financing was concluded on favorable terms, the leverage effect can also be used. The debt is deliberately increased in order to increase the profit. The explanation: the increased capital can bring in higher returns.
4. Due to the high returns, the return on equity also increases . Many investors use this measure to determine if an investment is profitable or not.
5. The interest payable to the investor is tax deductible as operating expenses. Thus, the company does not incur any disadvantage due to the interest payment.

Disadvantages through debt financing

But also the disadvantages of this financing technique should not be underestimated:

1. The lender will always try to keep its risk as low as possible. Thus, the investor can insist on certain collateral such as the entry of a mortgage .
2. Also, the agreed interest payments must be made on a regular basis, regardless of how the company looks financially. So an interest payment can sometimes fall into a rather bad economic time.
3. Moreover, the capital is only available for a limited period, so it must be repaid at a predetermined time.
4. Even if a lender does not have the right to co-decision with its financing, the independence of a company through debt financing is never completely left untouched.

Debt financing can make sense

Whether a debt financing is really the right decision for a company depends not least on the goals and plans of a company. Because the debt financing results in various advantages and disadvantages.
For investors, debt financing is never exclusively positive or negative. For some companies, a debt financing makes sense and brings several benefits. However, it always depends on the individual situation of the company and the time.

In the interest of the company, debt financing should also only help fill financing gaps and should not be used as an all-purpose weapon. A balanced ratio of equity to debt capital benefits every company and also attracts numerous investors and investors.

Invoice Finance for Small Businesses

Invoice financing, which is also referred to as accounts receivable financing lets business owners finance any outstanding invoices in their business. Companies that deal with invoice financing simply advance you cash and hold outstanding invoices, rather unpaid invoices as collateral. This, in turn, gives you the perfect opportunity to invest back into your business. In invoice financing, you have the opportunity to get an advance of up to 85% of your invoices value and then get the remaining 15% later on depending on the agreement between you and the invoice financing party.

However, there are other financing companies that can give you an advance of up to 100% the value of your unpaid invoices. Most repayments of the advance are set for when the customer or client clears their invoice payment. The most outstanding fact about invoice financing is that you can get the advance you request within a very short period of time. Most of the providers have you sorted within 24 hours.

Advantages of invoice financing for small businesses:

  • You don’t need to wait until the invoice payment is done to obtain cash.
  • Customer invoices are all you need as collateral.
  • The advances your business gets highly rely on the invoiced business credit.

Disadvantages associated with invoice financing:

  • The interest paid; or rather the service fee can be much higher as compared to traditional or typical financing.
  • The fee charged also depends on the period of time before the invoice payment is done.

Who is eligible for invoice financing?

This is pretty simple. As long as a business is based on a business-to-business model and it does currently have pending receivables, you are eligible to apply for invoice financing.

Basically, the deal is;

  1. These financing providers are not keen on your time, profitability or revenue in your business.
  2. As a matter of fact, it is the invoices you provide that act as collateral of the loan requested. As long as all the invoices check out and make sense, the financing companies really don’t get into the details of your business.
  3. Generally, the maximum amount of loan that your business can qualify for is based on the total value of the invoices you provide. It is important that you also remember that your creditworthiness is also one of the key factors that determine the amount of money you can be loaned by the financing company.
  4. You also need to remember that there are some other invoice financing companies that also go through your credit report before giving you the advance.

As discussed above, invoice financing is a kind of loan from the lenders. From a technical point of view, this can be bolded as the main difference between invoice financing and invoice factoring. In this technique of funding small businesses, the business owner doesn’t receive an advance but actually sells outstanding invoices to a factoring company at a discount. In return, the company gives you the cash right away. Later on, the company comes and collects the cash from your clients or customers. The window before the factoring company collects the cash from your customers depends on the agreement set. However, typically this period ranges from 30 to 90 days.