|What is Invoice Financing?|
|Thursday, 17 December 2009 00:00|
Let's examine a situation that is all too common in business. A small business lands a contract to supply products or services to a large company. It's a solid contract that calls for ongoing deliveries and will be very profitable for your company. However, there is a small problem. Your client has asked that you give them 60 days to pay the invoices.
This puts you in a complicated situation. If you try to negotiate for a quicker payment, your client may think that your firm does not have the financial wherewithal to provide the product or service. If you agree to those terms, you have to be prepared to cover all expenses for two months. It's a difficult choice. What's worse, if you can't afford to wait 60 days to get paid, your only alternative is to turn the opportunity away.
The common solution is to get business financing and use that to cover the 60 day gap. However, few conventional financing products are designed to solve this problem. A line of credit is probably a good solution. A business loan, on the other hand, may not be the best solution. Although business loans can help address this problem, they tend to be better suited to buy capital goods and equipment.
There is one solution that is specifically designed to solve this problem. It's called invoice financing. As its name implies, invoice financing provides funding for your net 30 to net 60 invoices. This is equivalent to getting a quick payment on the invoice and enables business owners to cover business expenses without having to wait up to 60 days to get paid by clients. It provides stability to company's cash flow, enabling the owner to better manage expenses and to better determine which opportunities to pursue.
Most invoice financing transactions are structured as a purchase, where the factoring company finances the invoice in two installments. The first installment, usually 80% of the invoice, is made as soon as you invoice your client. The finance company withholds 20% to cover any invoice discrepancies or underpayments. However, the remaining 20% less the discount, is advanced as soon as your client actually pays for the invoice.