How Invoice Financing Can Improve Cash Flow

Many business owners become frustrated with the administrative part of their jobs chasing down late payments from customers. The time spent in following up with customers to urge them to pay for services rendered or products delivered would be better served in working on income producing activities.

Invoice financing may be the answer you need.

With Invoice financing, also called accounts receivable financing, you don't borrow any money or get a line of credit. Instead, you finance your invoices for instant cash flow. The organization financing your invoices pays you and takes on the risks associated with unpaid invoices. Because of this, you won't get the full invoice amount. Instead, you receive the invoice amount minus the financing costs.

That doesn't sit well with you? Would you rather have $100 now or $120 in two months? You can invest the $100 to grow your business, which could add up to $300 in the two months you sat around waiting for the $120. Timing makes a big difference with cash flow and available working capital.

What can you do with the cash you get for financing your invoices? A lot. Here are five things:

1. Available cash flow: Grow your business, buy equipment, do anything you have wanted to do to build a better business.
2. Instant cash: Helps cut overhead.
3. Pay vendors: Paying your vendor bills early or on time can lead to better relationships and potential discounts.
4. Buy supplies, equipment and buildings: Some businesses find they can't stock up on supplies, which puts off finishing jobs for customers. With cash from your invoices, you can increase your supplies so you can meet more demand or keep up with demand.
5. Focus on your business: Your core business is what you're passionate about and prompted you to build the business in the first place. Freeing yourself from chasing down unpaid invoices gives you more freedom to do what you're good at and what you  love.

How do you shop around for invoice financing?

First, look at the interest rate and the number of outstanding invoices you have. The financial organization that finances your invoices will want to know if your customers (the ones that owe you) have good credit. They will also look at the payment period, which ideally is 30 to 60 days.

If you decide to pursue financing your invoices, it will help address your cash flow problems and turn to business-enhancing activities instead of being stuck on maintenance activities. Or you can try cutting costs to improve cash flow.