Any business, regardless of size, can experience cash flow shortages due to an imbalance between cash inflows and outflows. Those imbalances can be related to money that is expected to be received from outstanding invoices. If customers that owe a business money for goods and services take more time to pay or pay late, it can impact the ability to pay employees, utilities, rent, and other internal expenses. While some business owners and managers will choose to either take out a loan or dip into savings/surpluses, there are other short-term financing options. The discovery of various invoicing insights helps business owners find ways to make up for short-term cash flow problems.
Invoice factoring is an example of short-term financing. With invoice factoring, lenders purchase outstanding invoices from businesses. The financing companies charge a modest fee to purchase those invoices, but the businesses receive a majority of the invoices’ values upfront. Financing companies collect the amount owed from the companies that need to pay the invoices. The remainder of the invoice’s value is paid by the financing company to the business once the financing company collects payment. For example, company B owes company A $10,000 on a 30-day invoice. Company A sells the $10,000 invoice to a lender. The lender collects a three percent financing fee, which in this case would come to $300. The lender immediately sends $8,500 to company A and then contacts company B to collect the $10,000. Company B pays the lender the $10,000 originally owed to company A, and then the lender sends the remaining $1,200 to company A.
This form of financing has its advantages and its drawbacks. Invoice factoring is often an easier for businesses – especially small businesses – to obtain financing. Business owners can get the cash when they need it, instead of waiting for the money to roll in from slower-paying customers. The downside is that the lenders take the credit history of the customers into account when purchasing the invoices. If those customers are known for not paying their bills on time, lenders may be reluctant to purchase those invoices. Financing is also more expensive, regardless of its form, than waiting for cash. The reality is that the majority of businesses need to rely on some form of financing in order to meet short and long-term expense obligations. As long as financing is used responsibly, the advantages can outweigh the cons.