Invoice financing is one of the most innovative business features available for startups, small and medium businesses and even larger enterprises. This particular notion revolves around the idea of someone (factoring company) buying off your account receivables. Seeing how a lot of small businesses have trouble getting money from their overdue customers, this is sometimes the only way to remain afloat. Because of this, here are a few things that every startup or SMB owner should know about.
What is Account Receivable?
The first question that poses itself is, naturally, what these account receivables are. To put it simply, account receivables are all that money that your clients owe you, and should repay you in the next period. Even though this money is technically yours, you don’t have it at the moment and you are, therefore, unable to use it. There is also a lot of confusion regarding the difference between accounts receivables and accounts payable, but these two things are complete opposites. Account receivables are the amount owed to you, while account payables are what you owe to others. That simple.
Getting Invoice Financing
Once your company’s budget gets into a tough spot due to your debtor’s negligence, there is really not much you can do. Strong-arming anyone seldom works, and suing them takes time and rarely pays off. Because of this, getting invoice loans usually does the trick. By allowing a factoring company to buy off the debts owed to you (for 95 percent or more of their value) you get the money you need and no longer have to wait for those monthly payments. The first 80 percent of the invoice value you usually get in the first 24 hours, while you have to wait for the rest until your customers pay. If you do the math, you will notice that the fee, that these companies charge, rarely exceeds 5 percent.
More Cost Efficient Than Loan
The simple truth about invoice financing is that, although more convenient than corporate loan, it is much less used. The main reason behind this is the fact that less people are familiar with it. Just think about it, with invoice financing, what you get is a financial aid in return for the money already owed to you. In other words, someone out there is giving you your own money and charging a fee for this favors. Unlike with the loan, where you get someone to borrow these funds to you and be indebted to them, all you did here was ask for what is yours.
Additionally, there is no interest whatsoever, which is already a huge deal. For riskier loans, the interest rate will be substantially higher. The greatest problem here is the fact that this interest rate can change. In other words, you are taking a leap of faith which can backfire at any time.
Even though you may be in a situation where you have to use invoice financing, it is never a bad thing to know all your options. When compared to loaning money from the bank, or even worse, from your friends and relatives, invoice financing turns out to be one of the best chances you got. Still, the use of a word “best” here can never be completely objective, so it would be fair to assume that you are the only one who can pass this judgement.