After a sale comes billing, after billing comes… waiting to get paid. This wait can stretch a company cash flow. Small businesses are particularly vulnerable because their smaller cash reserve may make them more dependent on clients payment for the capital needed for investing, re-stocking and, in general, running their business.
Usually, an SME owner thinks of a bank loanfirst, but there are other ways to help a company’s cash flow. Invoice finance,for instance, shortens the time between issuing an invoice and receive payment,or at least a large part of the payment. This is how it works:
How It Works
(1) You send your invoice to your client.
(2) You also send a copy of the invoice to the invoice finance company, who will verify the invoice, and
(3) pay you (typically) 75-80% of the amount you have billed
(4) The client can either:
a. pay the invoice finance company on due date, and in this case you receive the balance less the interest the invoice finance company charged you; or
b. pay you on the due date, in which case you have to repay the money advanced plus interest to the invoice finance company.
(5) Either way, by payment due date you have received the whole payment less the interest the finance company charged you.
Invoice Financing: The Easy Way To Be Paid Quickly
Invoice financing improves cash flow and unlocks capital previously trapped in unpaid invoices. Although, technically, it is a loan you have to repay. The loan is based on the creditworthiness of the clients, and yours; most credit rating agencies would not consider it a debt.
A factoring arrangement is usually less flexible than invoice financing, but that mainly depends on the specific terms and conditions of each financial company offering that service.
If you have been accepted by an Invoice Finance company, each invoice you submit is a sort of ‘mini-loan’ secured on the invoice. It is cheaper and more flexible than a bank loan, definitely cheaper than an overdraft, and – as we mentioned earlier – it is not usually considered a short term loan.
We have already pointed out that invoice finance pays more attention to the creditworthiness of your clients; that does not mean that there are no eligibility criteria to be accepted for this service. Details may change from one financial company to the next, but, broadly speaking, it is possible to define some general criteria:
• The legal entity you use to operate. Generally, sole traders are not high on the eligibility list, incorporated legal entities are preferred.
• The product and service you provide.
• How long you have been trading, the longer the better.
• Your turnover, the higher the better.
• Your payment terms.
• Whether you want to include all your clients, or some specific type of clients. Also, the higher the average level of creditworthiness of your clients, the more likely you are to be accepted by an Invoice Finance company.
If you are interested in invoice finance, you should look at the terms and conditions of several companies to find the one that offers the level of flexibility you want for the cost you are prepared to pay. If you want to discount the invoice of international clients you may have a smaller range of companies and fewer variations in terms and conditions. You may also find companies that specialize in financing international trade but you may have stricter eligibility criteria.
Usually, it is easier to finance international trade if you agree to receive the payment from a client and then pay back the finance company. This is because the finance company only has a relationship with you and does not get involved with chasing the payment internationally. They fund you, are only interested in your creditworthiness, and see the solvency of your international client only as a risk-mitigating factor. Finance companies that accept payments directly from the client may be larger and offer stricter terms and conditions due to the complications of chasing payments from companies based elsewhere.
Invoice finance should not be used as the only way to fund a company receivables. Finance companies only fund a percentage of the amount of the invoice, usually between 75% and 80%, and may put a limit on the total amount they are prepared to finance at any given time. Therefore, there is a risk that you will not be able to discount any more invoices until you start receiving payments from your clients.
It may not be considered a debit, but it is a loan that will eventually be repaid. The interest rate for the loan may be fixed but the total amount you pay in interest is based on how long you have to wait before the invoice is paid. The faster your client pays, the cheaper the invoice financing will be. For instance, if you have an arrangement to advance 80% of your invoice at 1%, when the client pays you will receive 20% of the invoice (the balance) less the amount of interest for the loan of the 80%. The faster the client pays, the lower the total amount of interest will be.
An SME that invoices clients on a regular basis has the relevant level of turnover, but has cash flow issues arising from the payment terms granted to its clients has a flexible way of securing capital to solve those issues. Invoice finance cost can be attributed to each invoice you discount, it is a form of borrowing and will reduce the margins of each discounted invoice. An SME should also pay attention to the limits on the total amount discounted to make sure they are not caught short of funding at any specific time. Paying more attention to managing clients’ billing could be considered an indirect advantage to invoice financing.
Example of Invoice Financing
You’re a wholesaler of a restaurant. You sent a $10,000 invoice of ingredients and equipment to the restaurant that you sold to them. The terms of this invoice is to be paid within 1 month. However, the month of collection your company experienced faulty machinery and you require an immediate financial support and you need financial support to pay up for this unexpected emergency. Hence you approach invoice financing provider for an advance payment. (E.g 80% of the total invoice - $8,000)
With 3 decades of invoice financing and factoring experience in Singapore, Multiply started with the idea to simplify small business financing. We stripped off those complicated fees like annual maintenance fees and charge only an all-in flat fee. Once approved, your account stays with us forever and you request for funding only as you need. So you can focus on your business and leave your cashflow headache to us.
Let Multiply be your option for Invoice Financing!
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