Invoice finance, also known as invoice factoring, helps companies that have slow-paying clients. These companies usually can’t wait 30 to 60 days to get paid by clients. Invoice financing addresses this issue by advancing funds against unpaid invoices. It provides businesses withcash pay expenses and grow. Companies often use the funds from invoice finance to:
- Pay employees
- Pay suppliers
- Build inventory
- Cover tax expenses
- Start new projects
- Get more clients
1. Why use invoice financing?
Companies can benefit from using invoice finance in the following five situations:
a) Improve cash flow from slow-paying clients
The most common reason to use invoice financing is to improve cash flow due to slow-paying clients. Many companies must offer net-30-day terms to larger clients. However, the reality is that they can’t afford to wait 30 to 60 days to get paid.
Slow payments can create persistent cash flow problems for the business. These problems can get worse if the company is growing quickly. Financing their accounts receivable provides companies with immediate funds for their invoices. This solution eliminates the cash flow problem and provides the liquidity to meet payroll and cover other expenses.
b) New companies and small companies
Cash flow problems can affect companies of any size. But smaller and newer companies don’t have the traditional options available to larger companies. Invoice finance can be a great alternative. It is easy to qualify for and can be used by small companies. The main criterion for qualification is the credit quality of your customers. New or small companies with great clients can often qualify for funding.
c) Turnaround situations
Getting funding while trying to turn around a troubled company is nearly impossible for small businesses. The company’s financial statements often don’t look good enough to get bank financing. Unfortunately, this time is when they need financing the most.
Invoice finance can often help companies that are going through a turnaround. It provides a cash flow lifeline that enables the company to improve and become profitable again. Usually, the company is able to get a business line of credit (or similar product) once the situation improves.
d) Unable to qualify for a loan/line of credit
Loans and lines of credit are the most affordable forms of financing available to most companies. And in many cases, they are the best solutions for a company.
Getting conventional bank financing is difficult. Lenders provide funding only to companies with a good track record and solid financials. Furthermore, lenders also shy away from industries they deem “challenging’.
Invoice financing is an option for companies that can’t get conventional financing. It has simple qualification requirements. To qualify, you must have:
- Creditworthy commercial clients
- Good invoicing practices
- Good managers
e) Out of covenant with current lenders
Loan covenants can make it difficult to maintain a loan or line of credit – even for good companies. Banks often use conservative covenants that don’t provide the flexibility some businesses need.
For example, seasonal companies often run into problems with their covenants. There is nothing wrong with the company, per se. It’s just that their financials don’t look as good as they should during the slow period. This “seasonality” causes them to fall out of covenant on their financial ratios.
Invoice finance can be a good solution for companies that encounter this problem. Most lines have few covenants. Those that do have covenants have flexible rules that can accommodate most situations.
2. How does invoice financing work?
Invoice financing advances funds against the invoices from your commercial clients. Instead of waiting 30 to 60 days to get paid, the finance company pays you immediately. This payment provides you with the funds to run your company. The financing transaction settles when your client pays the invoice in full. Your client still pays on their usual schedule.
Most transactions have two instalment payments. The first installment covers 70% to 85% of the invoice. It is deposited in your account as soon as your client gets invoiced. Note that the invoice must be for completed services or a delivered product.
Once your client pays the invoice in full, the finance company deposits the second payment in your account. This instalment covers the remaining 15% to 30% that was not advanced initially, less the fee. To learn more, read “What is invoice finance? How Does it Work?” to learn more.
3. How much does invoice cost?
Invoice finance costs vary based on the size of the opportunity, the industry, and credit risks. Most finance companies charge an administration fee for every invoice and an interest rate on the advanced funds. To learn more, read “How Much Does Invoice Finance Cost?” which provides detailed rate information and an example.
4. What industries use invoice finance?
Invoice financing is used by most industries that work with business clients. Some industry examples include:
- Business Services
- Earthmoving
- Transport
- Labour hire
- Mining services
- Technology
Need more information?
We are a leading invoice finance company and can provide high advances at competitive rates. For more information, fill out our enquiry form and a representative will contact you soon.