Invoice financing: is it really for you?

Invoice financing sounds simple – a business submits its invoices to lenders, who in turn give them cash up front and collect the payments. Which means businesses do not need to wait 30, 60, or more days to collect their receivables. The early collection of money means better cashflow for SMEs, as opposed to having to weather or deal with delayed payments.

SME owners know delayed payments disrupt cash flow. Bad cash flow leads to lower productivity and competitiveness. Businesses that lack cash are not nimble and are unable to take advantage of a spike in customer demand, fulfilling project obligations, or expanding operations.

But is invoice financing really conducive for SMEs?

The typical first resort for an SME suffering from bad receivables is to take a bank loan. But most SMEs do not qualify for bank loans. SMEs tend to earn below a certain threshold a year and have low operating cash flow, making them unqualified for bank financing.

Most SMEs also fail the longevity test as traditional loans require businesses to have been around for three years, which cuts off funds for startups at their earliest stages, when they possibly need funding the most. Banks also require collateral in the form of machinery or owned real estate, which startups are usually not able to provide.

Most invoice financing companies are known for paying 80%-95% of the invoice value. They will also levy charges such as an advance fee, which might be between 2%-5% of the invoice amount. Although charges might differ smaller companies lose a certain amount of money every time they use invoice financing. This is money that they can reinvest in their business.

There are a number of articles online on how invoice financing can drive SME growth. One upside the articles claim is that that invoice financing "leaves you to focus on your business".

They use reasoning such as leaving an already busy SME owner time to focus on what they are good at, which is running and building a business, not chasing payments. SME owners should let someone else do the legwork in collecting that money, while releasing working capital at the same time.

"Invoice finance can give you cash flow, but it can also give you freedom. It can remove the stress of chasing money or concerns over funding the essential growth of your SME," an article said.

A small business owner should who counts every dollar as a resource should think about whether they should pay to focus on running their business, or start learning and reviewing their invoicing and receivables practice to be first in line to get paid.

Although paying a business late is never the right thing to do, we figure that rather than lose money on each invoice, and paying invoice financing companies, why not take on the responsibility of receivables so you will save the money? Getting everyone in the company on board with the receivables process, including the sales team, is essential. So is maintaining good relationships with your customers and ensuring your invoices are in order so you do not give your customers an excuse to not pay your invoices on time.

To know more, sign up for our Udemy course on getting paid on time.

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