Are you extending credit terms to your business customers? While offering a line of credit has proven to increase sales by as much as 50% it does have its drawbacks. When you allow customers to purchase products and/or services upfront but defer the actual payment for 30 to 60 days, it puts quite a bit of strain on your company’s cash flow. Each time you sell a product or service on credit terms, you create an invoice.
This invoice is called an account receivable and the good news is you don’t have to wait to collect your payment if you don’t want to. Instead, you can establish a line of credit against the invoice to an invoice financing company and receive an immediate cash advance. Typically, these advances can range from 80% to 90% of your current invoice amounts. Would you rather wait 30 to 60+ days to get paid by your customers or would you prefer to get paid within 24 hours? There are three main reasons why a business like yours would consider this type of financing: Rapid growth – You need the immediate funds to fulfill an onslaught of orders.
Slow paying customers – You are tired of waiting to get paid and chasing down customers for payment. Improve cash flow – Waiting on payments has put a strain on your company’s cash position and the fast cash would reduce the stress. So what does it take to qualify for this type of financing? Invoice financing is so convenient because it does not base its approval upon you or your company’s creditworthiness.
Instead, invoice financing companies will review your accounts receivables and the creditworthiness of each of your customers that you want to submit for invoice financing. The costs involved can range from 1-4% depending on the monthly invoicing volume. For example, if you are approved for a 2% rate, for a $1,500 invoice, you would only pay up to $30. On a final note, there are two types of invoice factoring you should be aware of, recourse and non-recourse factoring. Recourse means that if your customer does not pay their invoice, you will be responsible to buy the invoice back from the invoice financing company. Non-recourse factoring means that if your customer becomes insolvent then you will not be liable for the invoice.
Keep in mind there are several variations to non-recourse so make sure you are fully aware of the type of invoice factoring you are considering.
Invoice financing is a great way to fill the time gap between when your company invoices its customers and when you receive payment. Best of all, an invoice financing company can become your credit, risk and collection company for your business.
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