How Invoice Finance helps Companies Overcome Financial Hardships

Startup companies and even companies with history behind them which operate on limited capital will most likely encounter cash flow problems one time or another. There are banks and other financial institutions that offer loans to remedy such problems but perhaps the easiest and fastest way of getting much needed funding is to ask for loans from invoice finance companies.

Invoice financing

Next to cash in bank, receivables or collectibles from customers are a company’s most important asset because once collected they can be immediately used for sustaining operations. For small companies though with just a few people, collecting can prove difficult. That’s when cash flow problems start. Still, collectibles remain the best way to get out of the problem and invoice financing which some finance companies offer allows cash-strapped companies to make use of said collectibles and augment operating capital.

If fixed assets such as land can be used as collateral for loans, then why not unpaid sales invoices. This is precisely what invoice finance companies do – grant loans with invoices as collateral. The average loan amount granted is around 80% of total sales ledger value, though some companies go as high as 90%. Interest is paid on the loans and some fees for other services, but generally debt servicing is a less costly way of acquiring cash.

Invoice finance brokers offer two types of loans. One is invoice factoring, another is invoice discounting. Both provides ready cash that borrowers can utilize to boost production or transactions, but the two have some differences which borrowers must know to help them decide which one fits their needs best. In factoring a company practically sells its receivables since they also surrender the right to collect. Once the loan money is released the responsibility for collection is now with the broker. Discounting on the other hand does not relinquish collection responsibilities. The borrower still collects and turns over the collected money to the finance company. Factoring is often the mode chosen by small companies without established credit collection mechanisms while discounting is almost always preferred by bigger companies which have the resources to pursue delinquent clients. This also works to their advantage as the scheme allows them to maintain contact with customers who might still want to do business with them once the account is settled. The need to collect can be a stressful but should provide opportunities for learning.

Established businesses would favor securing loans from banks whenever liquidity becomes an issue. They could well afford to wait. Smaller businesses and start ups which rely on inflow of money from sales activities would choose invoice financing as the easier way to address liquidity issues for several reasons. Banks would not look kindly at them because of their cash flow positions. Processing of bank loan applications takes a long time.  Processing is usually not an issue with debt finance companies. They merely have to look at sales ledgers or account receivable schedules and perform some other things that could confirm accuracy of ledger entries and the money is available.