Owning a small to medium sized business and worried about the working capital of your company? It is true that contacting all your customers who have not paid their invoices causes a lot of stress. What can you do to improve this situation? Invoice financing is the solution! Now you are probably wondering: “What exactly does invoice finance mean?
Invoice Finance Definition
Invoice Finance is a form of alternative financing that is often used by small and medium-sized enterprises (SMEs) that are looking for a flexible and user-friendly way for funding. In this blog, we explain what exactly Invoice financing means, why this form of funding is particularly beneficial for SME entrepreneurs and whether Invoice Financing is suitable for your company.
Here are five reasons to opt for invoice financing
Fast cash available
Have you applied for bank loans and are you frustrated about the time that this entire process takes? Here invoice factoring comes to your rescue. With invoice finance, in most cases, you receive the amount of money on the same day that you submit the invoice. Is not that great? In this way, you prevent the risk that customers will affect your cash flow by paying too late.
Low factoring costs
Over the years, the prices for using invoice have dropped dramatically. Generally, factoring costs vary between 1% and 4.0% of the trade volume. Of course, the rates vary per industry.
Sustained growth of your business
If you want to develop your small business, you need stable cash flow. Here invoice finance comes into action. With invoice factoring, you focus more on recruiting new customers than on wasting time on your debtors. As a business owner you pay your suppliers, and at the same time, you avoid problems in the distribution chain. You can also provide credit lines to loyal customers who need credit facilities. All this together helps you to stay ahead of your competitors, who have financing problems and thus grow your business.
Focus on your core activities
Can you not concentrate on your core activities because you are worried about your financial problems? Switch to invoice financing. With this, you can always pay off your debts on time. It provides a reassuring feeling and ensures that you can entirely focus on the growth of your core activities and your customer service. And the best part is that you do not have to worry about the cash flow.
Receive money without incurring new debt.
When starting a small business, debt can be the best way at that moment. However, this can be risky when your company is unique. If you can not deliver the money on time, you will face legal problems. You want to avoid that, right? What can you do to prevent this type of situation? Choose invoice finance. You do not have to opt for an expensive loan because you receive the much-needed capital for your business from the factoring companies.
Benefits of invoice finance
- Allows you to increase turnover/sales
- Offers the possibility of extending payment terms
- Allows you to maintain excellent relationships with your contractors and positively affects the image of your company
- Eliminates the risk, guaranteeing the recovery of receivables for invoices
- offers the possibility to reduce administrative costs.
The main disadvantage of invoice finance is that you also have to pay an invoice fee, regardless of interest. It is either a fixed amount per invoice (for example 10 euros) or a fixed price (for example 20,000 euros per year) or a percentage of turnover (often between 0.1 and 1%). It can also be a combination of these. With Australian Style invoice (sales of invoices) you pay no interest, but only a percentage of the turnover (ranging from about 1 to 4%). Incidentally, the costs for invoice have fallen sharply in recent decades. The expectations show that this trend will continue.
Another possible disadvantage that you can experience is the ‘action’ that comes with it. Depending on which form of invoice finance you choose, a factoring company may require you to include a pledge clause, that your stocks are audited, and that pledge lists are sent. Practice shows that most companies get used to it (after 1 or 2 months). Customer satisfaction with factoring companies is generally quite high.
The range of alternative forms of financing has increased considerably in recent years in Australia.
1. Peer-to-peer (P2P): A well-known example of this is crowdfunding, where a large group, often individual investors, invest, lend or donate money via a platform. In 2014, three billion euros were spent in Europe via P2P (FTM, 2015), which according to PWC will increase to € 150 billion around 2020 (Peer pressure, PWC, 2015). Benefits of a crowdfunding campaign: a successful attack can provide a lot of exposure, it offers direct access to capital from a variety of investors and is reasonably comfortable to start.
2. A credit union is a non-profit bank for a specific region, sector or professional group and in fact functions as a cooperative. Entrepreneurs who are members of a credit union make money available, which is then granted by the board to entrepreneurs within the union.
3. Online lenders such as Spotcap are technologically driven companies that can quickly decide whether a company is eligible for a loan through the use of data and algorithms, in combination with knowledge. Unlike banks, where it takes an average of three weeks to get a definite answer, Spotcap can decide within 24 hours.
The following companies and businesses are particularly suitable for invoice finance:
- Secondment / employment agencies
- Printing/graphic industry
- Clothing companies/fashion