Out of the small businesses that fail, 82% do so because of cash flow problems. Luckily, some methods can help companies get out of this hump before it forces them out of business.
Invoice financing and invoice factoring take your invoices and turn them into cash. Read on to learn more about these techniques and how they can benefit your business.
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Invoice Financing
Invoice financing, also known as invoice discounting, is a cash flow method involving outstanding invoices. A lender will look at the value of your accounts receivable and lend you 80-90% of it as a loan or line of credit.
When a client pays the invoice, you repay the lender what they loaned you plus interest and other fees. With this business financing technique, you are responsible for collecting invoices from customers.
Invoice Factoring
Invoice factoring is when you sell control of your accounts receivable. To manage cash flow, you can send unpaid invoices to a factoring company that will immediately pay you a percentage of the value.
Once the customer pays for the invoice, the factoring company will handle the rest. They pay you for the remainder of the invoice minus the fees they charge.
Invoice Financing vs. Factoring
If you want to increase cash flow for your business, you can use either invoice financing or factoring. Although there are some differences between the two, they have more similarities than anything.
For a small fee, you can monetize on your outstanding invoices. In general, these third-party companies will take over all or most of your accounts receivable instead of taking a few invoices.
The biggest difference between the two is who collects the unpaid invoices.
When you opt for invoice financing, you are responsible for collecting invoices from your customers. In contrast, a factoring company will take full control over collecting invoices from your customers.
Which Method Is Right for Your Business?
Invoice factoring is often a better fit for larger businesses and invoice financing works best for small companies. However, the method you choose will depend on your business needs.
No matter the size of your company, you might be better off with invoice factoring if you need an ongoing source for business finances.
It is important to note that invoice factoring means you won’t have to collect invoices from those who pay late so you won’t be able to hide that you are using a factoring company.
Customers may see this as a sign that your business is in trouble. If you opt for invoice factoring, choose a company that presents itself as part of your team.
Increase Cash Flow With Invoice Financing and Factoring
There are a variety of reasons that a business needs to increase cash flow. Although there are different options out there, invoice financing and factoring might be the most beneficial choice.
If your company is struggling, these financial methods can help. If you need more financial advice or want to read other interesting articles, check out the posts on our blog.