There can be times in business when you need some cash ASAP. Your machinery might have gotten out of order, or the payroll deadline could be approaching without any running cash in sight. 

What’s interesting is that oftentimes the money you need to meet these demands is already yours, but stuck somewhere. For instance, if you work with other businesses, they likely clear invoices in up to 90 days, which may mean no accessible cash before that. 

In such a situation, if you don’t know your financing options, you might panic and feel forced to take on a high-interest loan. But, if you make the money already owed to you work in your favor, finances can be better managed. 

This blog explains how invoice financing works and how it can keep your cash flow healthy. Keep reading to know more about this strategy, and don’t let money matters stress you.

What is Invoice Financing?

Invoice financing lets you access the money tied up in your unpaid invoices immediately. Let’s explain it simply:

If you work with other businesses, you’ll know their standard payment terms are 30-90 days. Sure, your business is technically making sales, but you don’t receive that money right away, and you have to wait for a certain period. While it’s alright under normal circumstances, some things like urgent expenses or bills can make this schedule a problem. 

But there’s a solution. If you have unpaid invoices from your client(s), you can sell them to a financing company and receive quick funding to boost your cash flow. This is not technically a loan, rather an advance on the money you have earned, but it’s stuck in the system. 

Most financing companies can give you 80% to 90% of the money you have in unpaid invoices. And once your clients pay, you can transfer the due amount to your lender or have the clients directly pay them. This way, you can manage urgencies and not feel cash-strapped. 

How Does Invoice Financing Solve Your Cash Flow Challenges?

Any entrepreneur knows that accounting departments can take ages to complete payment processing. Add to that your bank’s protocols, and incoming dues seem to take forever. 

Therefore, solutions like invoice financing for businesses exist. This financing turns your accounts receivable into cash you can use immediately. 

Eliminates the Waiting Period 

Making a sale and having the cash don’t mean the same thing in the B2B world. Because of a gap between these two stages, you practically have plenty of work, but there is zero cash to keep the business running. Therefore, invoice financing removes this bottleneck by giving you access to your funds within 24 to 48 hours.

This financing can make your money liquid capital that you can use immediately instead of waiting for the clients to pay up. Suppose a printing company just completed a large order and spent $10,000 on the materials to get the job done. They then land another client for an even larger order, but need another $10,000 to buy enough supplies. 

To secure this opportunity, the business can finance its first invoice and get the cash back into its account to buy new supplies. Notably, invoice financing for businesses is faster than other loans because it’s based on work you have already completed.

A Debt-Free Financial Tool

Invoice financing is not technically a loan that further burdens your balance sheets. It’s simply a tool you use to secure an advance on your money delayed for whatever reason. 

A standard bank loan is another liability and will likely require monthly interest payments. This model will affect your credit and make it harder to secure more funding later. On the other hand, invoice financing does not weigh your business down with long-term debt. 

This funding is backed by work you have completed and acts more like a cash flow bridge that closes the gap between your expenses and income. As a result, you can keep your financial records clean and your debt-to-income ratio healthy. 

Scales with Your Sales

Most financing models, such as a business line of credit, come with a fixed cap. You can only borrow a set amount based on your financial performance and a limit set by the bank. 

Even if you grow faster than expected, your borrowing ability is still capped. To get more funding, you have to go through a long renegotiating process and might even have to put something as collateral. 

But if you go for accounts receivable financing, there is no limit to what you can borrow. 

a higher limit. This can stop your growth right when you are starting to see real success.

The funding you can secure is based on the invoices owed to you, which means it grows as you land bigger contracts. Let’s say a manufacturing company usually bills $50,000 a month and suddenly lands a huge new client. This client increases their monthly billing to $200,000, and to fulfil this order, they need more raw materials and hire extra staff immediately. 

Now, if they have a bank loan, it won’t raise their credit limit fast enough to cover these costs. But with invoice financing, the company can use its new, larger invoices to get more funding. 

Focuses on Client Credit

Your credit score is a big determinant for most loans. If your business is new or your credit is not that good, the bank might reject you regardless of how much work you have lined up. 

Luckily, this doesn’t happen with invoice financing. The primary security for this funding is the invoice, so the focus shifts from your financial history to the creditworthiness of your customers.

For example, if a new security firm lands a contract with a well-known university, its own credit score obviously won’t be enough proof of credibility. But when the university owes this company enough in unpaid invoices, it can take an advance against it. 

Preserves Equity and Assets

Lenders often require you to pledge personal assets as collateral for major loans. Also, some contracts require you to sell a percentage of your company to investors to get the much-needed cash liquidity. Needless to say, these methods put your personal life and your control over the business at risk.

Good for you, invoice financing doesn’t risk your equity or assets. Your outstanding invoices back it, and you don’t need to sign away equity or put your property on the line. 

You get to maintain 100% ownership and still boost your cash flow to meet the expenses at hand. 

Use Your Business Stats Strategically 

If you’re making enough sales, not having running cash is not a big problem because there is a quick fix in the form of invoice financing. Selling your unpaid invoices a bit earlier will give you enough funding to keep the lights on and not panic because of small expenses. 

And what place could be better for this fast funding than ROK Financial? If you have invoices aged up to 90 days, you can access funding of $100k or more here and keep your business moving. Call us today for more clarity and control of your cash flow. 

FAQs

1. Can I choose which invoices to finance, or do I have to do them all?

This can depend on your specific cash needs at the time. For example, if you only need a small amount, you can finance one invoice. But if there is a larger cash crunch, you can finance your entire ledger. 

2. How much of the invoice can I actually receive in this financing?

You can receive 80% to 90% of the invoice value. However, the exact percentage depends on your industry and your customers’ credit strength.

3. What if my customer doesn’t pay the invoice?

Invoice financing is a recourse agreement, and you are ultimately responsible for the funds. If a customer doesn’t pay within the agreed timeframe, you are required to pay back the advance yourself or swap the unpaid invoice for a new one to keep your account balanced.