Inside Fixing Financial Challenges by Advancing Cash for Invoices

How to Overcome Cash Flow Gaps

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Small business owners are often faced with financial challenges, especially when their customers request for lengthy credit terms. This is because these large and lengthy credit terms adversely affect cash flow considering that many small and upcoming businesses do not have enough financial muscles to take them through these extended wait-up periods.

While offering credit terms, especially to large clients, can improve business relationships with these clients, it often poses a major dilemma for small business owners in the sense that it puts cash flow to risk.

However, cashing in on unpaid invoices from these clients can be an ideal answer to this problem and dilemma.

The truth of the matter is; getting cash on your invoices can be a complex type of lending. However, it revolves around selling your unpaid invoices to a lender with an agreement that he/she will give you a cash advance. The lender buys the invoice, gives you a cash advance against the value of the invoice, but at a reduced value, usually around 70-90%. When your client pays the invoice, the lender will deduct his/her advanced cash and give you the outstanding balance minus the charges accrued. For that reason, here are some exceptional ways of using invoice financing to perfectly fix a small business’ cash flow challenges.

Invoice Discounting

This is probably the easiest way of getting cash for your pending invoices. It is often a confidential facility where your clients are completely unaware of the arrangement or that you are cashing their invoices.

Under this principle, you are fully responsible for all matters, credit control and debt collection on the unpaid invoice. 

Under this agreement, the invoice payments should be paid to a specific bank account with your business’ name, but under the control of the lender. This is a method that is preferably better for businesses with credit control teams in place, but the lender has the authority of regularly auditing your business and can even check your business location.

Factoring

While factoring also follows the same principles of cashing in on unpaid invoices, it gives the lender full control of the business’ unpaid invoices. This means that the business will outsource the responsibility of credit control and debt collection with access to advance cash. The agreement is disclosed to the client in the sense that each invoice should plainly indicate that it is being financed and chased by the lender. 

This arrangement is obviously advantageous for a small business that cannot fully source or employ full-time credit control staff. In most cases, lenders giving cash advances on invoices will offer guidance on credit limits, which in return gives you the chance of concentrating on growing your business rather than spending a lot of time following up on unpaid debts and invoices. 

Online Invoice Auctions

We are in an advanced business world where online platforms have grown as an important part of business. To be precise, online business platforms will not lend you cash but work in an appropriate way to set up an auction for you and your business where approved investors can bid for your unpaid invoices in return for cash advances. Such platforms give you the power to determine the maximum fees that you are willing to give and how many invoices to sell.

These auctions are always competitive and you are likely to get the best deal.

Under this arrangement, you can decide to disclose this information to your client that the invoice is financed. This, however, depends on the nature of your business deals and their supporting paperwork. Remember that this type of invoice financing can be useful for businesses that may be deemed so risky for mainstream cash on invoice lenders.

Selective Invoice Financing

Commonly known as Spot Factoring, this arrangement gives you the opportunity to select or choose unpaid invoices that you wish to cash in on. You can choose when to sell these invoices or the percentage of the invoice value you want to receive up front. 

This arrangement can be suitable when the business has unpaid invoices, but is not in dire need of cash and can cash in on some of its invoices to cover future overhead.

From the above insights, it is noticeable that invoice financing can be a crucial way of injecting cash into your business. Small business owners have a host of options under this arrangement and have the opportunity to choose the method that best works for their business conditions.