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Mar 16

Invoice Finance: What It Is and How You Can Use it?

Reading Time: 4 mins

If you’re a small business owner, then you know that cash flow is essential to your success. You need money to pay your bills, invest in your business, and keep things running smoothly. But what do you do when you have an invoice that’s due but doesn’t have the cash available to cover it?

That’s where invoice finance comes in. Invoice finance is a type of financing that allows businesses to get cash quickly based on the value of their unpaid invoices. This can be a great option for businesses who need money in a hurry, but don’t want to take out a loan or sell equity in their business. In this article, we will discuss what invoice finance is and how you can use it to improve your business’ cash flow.

What invoice finance is and how does it work?

Invoice finance is a type of debt financing where a business can sell its accounts receivable (invoices) to a financial institution at a discount. The financial institution then collects the full amount of the invoice from the customer, minus the discount that was paid to the business, and pays the business in cash immediately.

This type of financing can be a great option for businesses that have strong sales but weak cash flow, as it provides them with quick and easy access to cash. It can also be helpful in managing seasonal fluctuations in cash flow.


Types of invoice finance products available

Invoice finance is a type of financing that allows businesses to borrow money against the value of their accounts receivable. There are a few different types of invoice finance products available, and each one has its own benefits and drawbacks.

The two most common types of invoice finance products are factoring and invoice discounting. Factoring allows businesses to sell their accounts receivable at a discount in order to get immediate cash flow. Invoice discounting allows businesses to borrow money against the value of their invoices, but they keep possession of the invoices and can choose when to repay the loan.

There are also a few newer types of invoice finance products available, such as supply chain financing and debtor finance. Supply chain financing allows businesses to get paid sooner for the products or services they’ve already delivered, by borrowing against the value of their purchase orders. And debtor finance allows businesses to borrow money based on the value of their customer relationships, instead of just their invoices.


The benefits of invoice finance for small businesses

Invoice finance can help small businesses by freeing up cash flow. This is because the company can sell its outstanding invoices to a third party (i.e. a financial institution) in exchange for an immediate infusion of cash. This money can then be used to cover day-to-day expenses, invest in the business, or pay down debt.

In addition to the above benefits, invoice finance can also improve a company’s credit rating and make it easier to get loans in the future. This is because it shows that the business has access to capital and is able to generate income even when its’ sales are slow.


The types of businesses that can benefit from invoice finance

There are a number of businesses that can benefit from invoice finance. The most obvious are businesses that have a lot of unpaid invoices (due to slow-paying customers, for example). But there are other types of businesses that can also benefit, such as:

  1. Businesses with seasonal swings in revenue (e.g. retailers) – in the slower months, they can use invoice finance to bridge the gap between payments from customers and their outgoing costs;
  2. Businesses with a high proportion of debtors – by freeing up cash tied up in unpaid invoices, they can use that cash to invest back into the business; 
  3. Startups – by getting immediate access to the money tied up in unpaid invoices, they can avoid having to take out expensive loans or use their own personal funds.


The risks associated with invoice finance

Invoice finance can be a great way for businesses to get the cash they need to grow and expand. However, it’s important to understand the risks involved in this type of financing.

One of the biggest risks is that you may not be able to repay your invoice finance lender. If you’re unable to repay your loan, you could end up in debt and face legal action.

Another risk is that your business could go bankrupt if you can’t pay back your invoice finance lender. This could leave you with large debts and no way to pay them back.


Tips for using invoice finance to grow your business

  1. Make sure you have accurate and up-to-date invoices. This will help ensure that the finance company can assess your invoice quickly and accurately.
  2. Keep an eye on your credit score. A good credit score will make it easier for the finance company to approve you for invoice finance.
  3. Have a clear understanding of the terms and conditions of the finance agreement. This will help avoid any surprises down the road.
  4. Make sure you keep up with repayments on time. Failing to do so could damage your credit score and make it more difficult to get approved for future invoice finance.

Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence. 


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