There are several benefits that can be gained when a company decides to invoice finance. A business that deals in the sale of products or services to other businesses will receive the advantage of improved cash flow by using an invoice finance service.
Basically, to invoice finance means to sell or assign your outstanding invoices to an invoice finance company. This company in most cases will give you instant access to a percentage of the total amount of the unpaid invoices assigned to them, commonly from 70-90% of the value of approved invoices. In many cases they may also take responsibility for invoicing, chasing and collecting owed invoices as well as accept a percentage of the loss on unpaid invoices.
Having access to these funds greatly increase the cash flow within your company. Cash on hand for increased production, savings by way of discounts on company expenses, decrease or even elimination of business expenses, and improved opportunities for business loans.
By using an invoice finance service there is no waiting 30-45 days for people who pay on time, and even longer for late payments on invoices. That cash on hand can be more readily available for production, creating an immediate availability for more sales.
Another area the right business can gain greater cash flow from using invoice finance is in taking advantage of discounted payments of business expenses. Many companies offer discounts of as much as 10% if their invoices are paid on receipt or within a certain period of time.
With invoice finance you have cash on hand to pay your bills sooner, rather than having to wait until your customer pays you for your product or service. Increased cash flow also increases your companies purchase power, making it possible to negotiate better terms or discounts from suppliers. The savings in these two areas alone will in most cases outweigh the fee from the invoice finance service.
There are other business expenses that can be cut back or even eliminated when using invoice finance, for example: administration costs, stationery, and office equipment. When adding the expense of employing an accounting clerk, not only their salary but also company benefits, it’s easy to see some great advantages to using an invoice finance service.
Invoice finance can be particularly helpful to a business in the start-up phase. Most lending institutions have strict rules on lending to ‘new businesses’. A bank or lender will only consider a small portion of outstanding (unpaid) invoices owed, often only 40% of the total amount of outstanding invoices, when administering a business loan. By invoice financing your ledger shows cash on hand in place of a large amount tied up in outstanding invoices.
There are some disadvantages to using an invoice finance service. The goods or service your company supplies can have a huge effect on whether your company should use invoice finance. Businesses providing recurring services or product orders are good candidates, while invoices for one-time orders might find it difficult to obtain this type of funding.
These companies prefer to know the debtor and their track record in paying debts before accepting invoices owed by that debtor. Another disadvantage would be if the mark-up sale price of the goods or service provided were less than the amount of the invoice finance fee.