Running a business can be a very cost-intensive process in most industries. Regardless of what type of business you’re in, there’s a good chance that you’re going to have some bills to pay. When times are tough for your business, this overhead could end up making you close your doors for good. Many businesses in this situation use a strategy called invoice financing to help out during the lean times. What exactly is invoice financing and how can it help your business?
Invoice Financing Basics
The basic idea behind invoice financing is pretty simple and it can have a dramatic impact on the success of your business. When a business closes an invoice with a customer, they are then owed a debt at that point. Even if the business fulfills their part of the deal, the customer still owes them money. Until the customer pays their bill, the company is basically being held hostage financially. With invoice financing, the company can get an advance on the value of that invoice before they actually collect any payment from the customer.
The business works with an invoice financing company and shows them the invoice that they have closed. The financing company looks at the customer and determines if they are creditworthy. If the client is deemed creditworthy, then the financing company will give the business an advance on the value of the invoice. At that point, when the customer pays his bill, the money will go to the financing company instead of to the business that closed the invoice. In some cases, the business will receive another small payment in addition to the advance. The financing company will keep the amount that they advanced and a fee on top of that.
Improving Cash Flow
One of the big advantages of using this type of arrangement is that it can help your business improve its cash flow. With invoice financing, you no longer have to wait until customers pay their bills. Instead, you can get money shortly after closing an invoice for the first time. As soon as you get the invoice signed by the customer, you can fill out an application with an invoice financing company. If the customer is seen as a good credit risk, then the financing company will send over the money right away. By doing this, you can significantly improve your cash flow. You don’t have to worry about waiting on payments to pay the bills, since you’re going to be getting payments much faster than normal. If your sales are strong, but your collections leave something to be desired, this method can significantly improve your business overall.
Doesn’t Depend on Business Credit
Another nice thing about this type of business arrangement is that you don’t have to worry about the status of your own business credit. With invoice financing, the financing company mainly looks at the credit profile of the customer who is responsible for paying the bill. This means that even companies that have poor credit profiles or those that haven’t been in business that long can still use invoice financing to get paid.
If you’re thinking about getting involved in invoice financing, it’s important to make sure that you do your homework first. Look at the company that you are considering working with and make sure that the fees you’ll incur are reasonable. Some financing companies are better than others, and you need one that’s going to work with you to make the process as affordable as possible. Once you find a good one to work with, you can take your business to another level.
This is a guest post provided by Andrew Cravenho, CEO of cbacfunding.com, an invoice financing exchange that connects businesses in need of immediate capital and factoring companies. As a serial entrepreneur, Andrew focuses on helping both small and medium sized businesses take control of their cash flow. Prior to CBAC, Andrew founded an annuity financing company and a real-estate investment firm.