How to Fund a Company with Invoice Financing

Business owners are usually surprised that a business that has solid income can actually have serious cash flow problems. Sounds like a contradiction, but consider that income is usually booked when you invoice the client - not when they pay. And in the commercial world, clients pay on "terms" and can take 30 to 60 days to pay for their invoices. This cash flow gap can surprise many business owners and create serious problems to the company.

One way to handle the gap is to try to convince clients to pay their invoices sooner. Sometimes this works. Oftentimes, it doesn't. Clients like to pay invoices in 30 to 60 days because it helps their own cash flow. You can be sure they will be reluctant to change their payment habits.

Another alternative is to apply for business financing. The current lending environment is difficult though, and getting a business loan will require substantial work and take time. Since most institutions are being very careful with their business loans, you can expect them to be very diligent and require a lot of documentation, such as financial and tax reports. And even if you have reasonable financial statements, there is a chance your request will be denied for other reasons.

There is a third alternative is to use a financial intermediary to get a quick payment on for your invoices. Invoice financing, as the process is called, is relatively straight forward. A financing company advances a payment against your net 30 to 60 invoices. They hold the invoice until it pays, while you get immediate use of the money. The company charges a fee, usually a percentage of the invoice, for this service.

One advantage of this form of financing is that the financing company provides you with financing based on the strength of your invoices. This enables small companies with a good list of clients to get this form of financing. Another advantage of invoice financing is that it's easier and faster to qualify for than a small business loan.

Invoice financing can be a great solution for companies that have good clients but can't wait 30 to 60 days to get paid for the products and services.