Cash-strapped businesses have trouble finding working capital, and they generally don’t want to take on more debt. Invoice financing allows them to get a cash advance on unpaid invoices. It could be a good alternative for your clients. Read more to learn more about invoice financing and how it can help cash flow.
Only about half of Australian small businesses are cash flow positive in any given month. Tight cash flow makes it hard to pay bills, hire staff, buy inventory, or expand. And it stresses business owners out – keeping them up at night.
Businesses in this situation have traditionally either taken out a loan, used a high-interest credit card, or struggled by without the cash. Many choose to go without, because lending seems risky and hard to do. Invoice financing can be a faster, more flexible option.
Some finance companies will advance a business 80 to 90 cents in the dollar on unpaid invoices. The business gets cash almost straight away, instead of waiting for the debtor to pay. And when the debtor does pay, the business gets a second (remainder) payment.
There are fees to consider, of course, but it can be a great way for your clients to overcome cash flow shortfalls.
While traditional loans are a long-term debt that usually has to be carried on the balance sheet for over a year, invoice financing works differently. It speeds up a business’s access to the money that it’s owed. This type of finance is generally able to be paid back quickly, which makes it a good shorter-term solution
Invoice finance isn’t typically paid back until the original invoice is settled. Businesses who use these services don’t have to make fixed-term repayments. That’s great for cash flow
Small businesses carry a lot of cost on big jobs. And payment is often slow when there’s a big corporate involved. That’s a bad combo. Invoice financing allows businesses to take on potentially lucrative contracts without getting stretched too thin.
Businesses can choose how much credit they take out when using modern invoice financing companies. In the past, they had to sell their entire accounts receivable. But now they can stay in control of their book and credit needs. Also, because invoice financing is typically paid back in months, not years, they can borrow again if need be.
Businesses can get invoice finance within a day or two of applying if they use online accounting and invoicing software. That allows you and your clients to act fast and fix cash flow issues on the fly.
Small business owners don’t need to leave their office, store or workshop to apply for invoice finance. They can connect to providers via online accounting software, flag the unpaid invoices that they’d like to finance, and apply on the spot. There’s no paperwork to do. And with the right app, they can even manage the whole process from their mobile
It’s important to track part payments and fees against each invoice that’s financed. Some providers will automatically update that information in your client’s online accounting software – which really streamlines the bookkeeping.
There are many situations where invoice financing is a useful and valuable tool, but it’s not always the right option. Discourage clients from using it as a band aid on recurring cash flow issues. Help them deal with the underlying causes rather than letting bad habits develop.
Invoice financing isn’t a regulated industry. There are plenty of trustworthy providers but it pays to be careful about who you use. You should also be clear about the specifics of the product they’re offering.
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You can connect to respected invoice finance providers through your online accounting software. It’s free to integrate Xero with:
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