If you’re a business owner who often finds yourself waiting weeks or even months to get paid by your customers, then invoice finance may be a good solution for you.
This type of financing allows businesses to get the money they need now by using their unpaid invoices as collateral. There are several different types of invoice finance, so it’s important to understand what each one entails before making a decision.
In this blog post, we will explain in detail what invoice finance is, go over the three most common types of invoice finance: factoring, discounting, and asset-based lending as well as cover a few essential tips on how to choose the best invoice finance provider for your needs!
What is invoice finance and what does it do?
If you ever wondered what is invoice finance, here is a simple answer: Invoice financing is a type of short-term borrowing that small business owners can use to get cash quickly. When you invoice your customers, you can borrow against the value of those invoices. The lender will give you a percentage of the total invoice amount, usually between 70% and 80%. You then have to pay back the loan plus interest and fees over a period of time, usually 30 to 60 days.
There are several benefits of invoice financing for small businesses.
First, it provides a way for business owners to get cash quickly without having to wait for their customers to pay their invoices. This can be helpful if you need money to cover important expenses or if you’re experiencing a cash flow crunch. Second, invoice financing can help you avoid late payments from customers by giving you the money you need to pay your bills on time. Finally, it can help you build business credit and improve your cash flow by providing a steady funding source.
Three most common types of invoice finance:
Factoring – what is it and how does it work?
Factoring is a type of invoice finance where a business sells its accounts receivable (money owed to it by customers) to a third party. The third party then becomes the owner of the accounts receivable and is responsible for collecting the money from the customers.
The business that sells its accounts receivable gets an immediate cash infusion, which it can use to pay bills, expand operations, or invest in new products or services. In addition, the third party assumes the risk of not being able to collect the money from the customers, which means that the business doesn’t have to worry about bad debt.
Discounting – what is it and how does it work?
Discounting is a form of invoice finance that allows businesses to borrow money against the value of their outstanding invoices. This type of financing can be very helpful for businesses that have a lot of cash tied up in their accounts receivable, as it allows them to access that money immediately.
The way it works is pretty simple. Once a business has been approved for a discounting facility, it will provide the lender with a list of its outstanding invoices. The lender will then advance a percentage of the total invoice value, minus any fees and interest. Once the customer pays the invoice in full, the lender will forward the proceeds to the business minus any applicable fees and interest.
Asset-based lending – what is it and how does it work?
Asset-based lending is a type of financing in which a business borrows money by pledging its assets as collateral. The most common type of asset used as collateral is accounts receivable, but assets such as inventory, equipment, and real estate can also be used.
The advantage of asset-based lending is that it’s much easier to get approved for than traditional loans. This is because the lender is not relying on the borrower’s credit history or future earnings potential, but rather on the value of the pledged assets. And because the interest rate is based on the use of those assets as collateral, it’s often cheaper than traditional loans.
Tips for choosing the best invoice finance provider for your needs?
When it comes to choosing an invoice finance provider, there are a few things you need to keep in mind. First and foremost, you need to make sure that the provider is reputable and has a good track record. There are a lot of new providers out there that may not have the experience or expertise to provide good service.
Second, you need to make sure that the fees charged by the provider are reasonable. Invoice finance can be expensive, so you need to be sure that you’re not overpaying for the service. Compare fees from different providers and make sure you’re getting a good deal.
Finally, you need to make sure that the provider offers good customer service. This is important because if there are any problems with your account, you need to be able to get in touch with someone who can help.