Do you own a small or medium sized company that needs funding? Read this article to learn about invoice financing.
At one point or another, almost every company will need some form of business financing to grow the business to the next level. For small companies, finding the right type of business funding can determine the difference between success and failure.
One of the most common reasons that small companies look for funding is cash flow problems. These are usually caused because clients don't pay their invoices immediately, but rather pay them in 30 to 60 days. The company dips into their reserves to cover expenses, while they wait to get paid. And if the company has minimal reserves, as small companies do, there is a chance that the company will eventually run into problems.
You can address this cash flow problem in three ways. Your first option is to try and get clients to pay their invoices sooner. This has little chance of success since large companies usually demand 45 day payment terms and put a clause to that effect in their contracts and purchase orders. Your second option is to get a business loan from an institution. The problem with that strategy is that business loans have difficult qualification criteria. Institutions require that your company have impeccable financial statements, a solid growth history and substantial assets. Almost by definition, small companies do not have substantial assets.
Your third choice is to finance your invoices. Invoice financing solves the cash flow problem by providing an advance against you slow paying invoices. This provides your company with the liquidity it needs while reducing the burden of waiting for invoices to be paid. The transaction works by using a financial intermediary, who funds your invoice and holds it to maturity. The transaction is then settled once the clients pays the invoice.
Most invoice financing transactions are structured as a purchase - where the financing company purchases the invoice from your company at a discount. Since the financing company is purchasing the invoice, one of the most important criteria for their decision is the credit worthiness of your client )who is paying the invoice). This feature makes invoice financing accessible to small companies whose biggest asset is their customer list.
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