When you’re a small business, every penny counts. You need to have money available to cover expenses, invest in your company, and grow your business.
Sometimes, though, it can be difficult to get the capital you need in a timely manner. Or what do you do when an unexpected expense comes up and you don’t have the cash on hand to cover it? That’s where invoice finance comes in!
In this blog post, we will discuss the ins and outs of invoice finance for small business and how it can benefit you. Here’s a look at what invoice finance is, how it works, and whether or not it’s the right solution for your small business.
What is invoice finance and how does it work?
Invoice finance is a type of financial product that enables businesses to access cash from their unpaid invoices. This can be useful for companies that are waiting on payments from customers and need working capital to cover expenses in the meantime.
Here’s how it works: businesses can typically receive up to 85% of the value of their invoices within 24 hours, with the remaining balance paid once the customer pays the invoice in full. The advantage of this arrangement is that businesses can get funding quickly and without having to take on debt.
There are two main types of invoice finance: factoring and invoice discounting.
The different types of invoice finance products available
There are two main types of invoice finance products available: factoring and invoice discounting. Both of these products can be used to provide working capital for businesses, by using invoices as collateral.
Factoring is a type of financing where a business sells its invoices to a factor, at a discount. The factor then provides the business with cash upfront and collects payment from the customer later on. This allows businesses to get cash flow quickly, without having to wait for customers to pay their invoices.
Invoice discounting is similar to factoring, but instead of selling the invoices outright, businesses only use them as collateral for a loan. This means that businesses still have to collect payments from customers, but they can get a loan against the invoice value to improve their cash flow.
The benefits of invoice finance for small businesses
There are a few key benefits that invoice finance for small businesses can offer:
- It can help to improve cash flow, as you can get access to the money tied up in unpaid invoices much more quickly than if you wait for customers to pay them on their own.
- It can free up capital that you would otherwise have to use to cover day-to-day expenses since you no longer need to wait until you have enough cash on hand to pay suppliers.
- It can provide a cushion against financial setbacks, such as late payments from customers or unexpected costs. This can help your business stay afloat during difficult times.
- It can give you more flexibility when it comes to managing your finances, as you can choose how much money you want to borrow and for how long.
How to choose the right invoice finance provider?
When it comes to finding the right invoice finance provider for your small business, there are a few key factors you’ll want to keep in mind.
First and foremost, invoice finance is all about cash flow and making sure you have the working capital you need to keep things running smoothly. With that in mind, you’ll want to find a provider that can offer you a competitive rate and flexible repayment terms. You’ll also want to make sure that the provider has experience working with businesses like yours, as this can make a big difference in terms of getting the most out of the system.
Finally, be sure to read up on customer reviews before making your final decision—this will give you some insights into what others have experienced with different providers.
Things to watch out for when using invoice finance
There are a few potential pitfalls to be aware of when using invoice finance.
First, if your customers are slow to pay their invoices, this can put a strain on your cash flow.
Second, depending on the type of arrangement you have with your invoice financier, you may be charged fees for the early repayment of invoices (i.e. before the due date).
Finally, it’s important to make sure that you keep on top of legal and accounting requirements when using invoice finance, as there can be some complexities involved.
However, overall invoice finance can be a great way to improve your business cash flow and give you some breathing room when it comes to managing your finances.