Invoice financing is a form of financing where a company sells outstanding invoices to a financing company. This provides immediate liquidity, as the company quickly receives cash while the financier later collects the customer’s payment.
Advantages of invoice financing:
- Quick liquidity
- Improved cash flow
- No new debts
Disadvantages of invoice financing:
- Costs and fees
- Dependence on customers’ creditworthiness
- Possible reputational damage if customers know invoices are being financed.
Who is invoice financing interesting for?
Invoice financing can help reinvest and grow a business because you don’t have to wait for customers to pay outstanding invoices. The DSO will significantly improve, boosting cash flow. It can be beneficial for both large and small companies, but there are a few things to keep in mind when deciding if this is suitable for your business.
Companies that send invoices with long payment terms are more likely to benefit from this form of financing. If the money turnover rate is high, it becomes even more interesting. Take, for example, a staffing agency. If a staffing agency pays its temporary workers weekly and sends an invoice once a month with a payment term of 30 days, it often needs liquidity. If this company is also growing, you can calculate that there is always a need for additional financing. In this example, there is a logical connection between the challenge they have within the company and the financing of their invoices.
The benefits of invoice financing
When you need money to finance growth or an investment, it’s always nice to be able to come up with collateral. This removes the risk for the lender. This can result in a higher financed amount and a lower interest rate. In principle, invoice financing has a clear beginning and end. After all, an invoice is paid on average after 40 days. It is therefore usually convenient to make invoice financing a continuous process, where new invoices are also submitted and financed. As the flow of invoices grows, the financed amount also grows. And that supports further growth. Here are three benefits of invoice financing:
1. Maintain a stable cash flow and let your business grow
To grow a business, a positive cash flow is necessary. Factoring is a way to achieve this. Instead of chasing debtors, you can focus on acquiring new customers, paying suppliers to prevent supply chain constraints, and hiring new employees.
2. Improve customer relationships
Debt collection can be one of those tasks that give you a terrible headache. Calling customers, sending emails and reminders. By financing outstanding invoices, you are relieved of these time-consuming tasks. This gives you the chance to focus on other aspects of the business, including building good customer relationships.
3. Get your money quickly
Factoring can usually be set up within a week or two. This allows you to quickly respond to a cash flow shortage and finance other business expenses, such as paying wages.
The disadvantages of invoice financing
There are also some disadvantages to invoice financing. It is often quite complicated to organize. You have to submit a lot of forms. These documents are intended to assess and exclude as many risks as possible from the financing. For example, if you send invoices to countries outside the EU, they are considered riskier. In that case, an amount is deducted from the amount that can be financed. The stability of your organization is also taken into account.
Another common disadvantage of invoice financing is that it is expensive. Especially in the field of factoring, there is a lot of supply from private equity organizations. And these organizations have substantial profit targets. Ultimately, supply and demand simply come together here. An organization that wants to grow faster and a financing provider that wants to make a return on capital.
Conclusion
If you need financing, there are many options. Get well informed and request quotes from different parties. Our advice is always to first make an analysis of the precise need and your own strengths and weaknesses. Where does the value of your company lie? And what can you offer as collateral?
Interested in faster payment of your invoices? Request a free online consultation.