How Early Invoice Finance Can Benefit Your Business

As a business owner, you know cash is king. It finances your payroll, enables expansion and keeps you afloat during unexpected events or downturns. There are any number of ways that you can fund your business, be it through a bank loan, line of credit, private investment or otherwise. As far as bank loans or lines of credit, unless you meet their requirements, you might not even qualify. If you do, the rates and fees might be exorbitantly high. This can create problems for your business as you begin to examine your own financial obligations. This is where financing alternatives can come into play.

Alternative finance solutions have been part of the business landscape for years, but it’s in recent days they have been moving online. In the U.S. alone, the online alternative finance market reached $34.5 billion in 2016, a 22 percent jump over just one-year prior. The alternative finance market features options, as it’s not one size fits all. There are “buyer-centric” solutions, while others could be considered “supplier-centric” services. In each case, they allow business owners a way to get the money they need to fund their business in exchange for a fee. In the end, it helps business owners, especially SMEs who often face challenges in securing credit, to get the cash infusion they need when they need it.

The benefits of alternative finance extend beyond simply getting the cash in hand. If you as a business owner know when and exactly how much you’re going to get paid, you can better manage your finances as a whole. You can smooth out your income stream rather than face peaks and valleys, enabling you to focus on growing your business and looking toward the future.

So let’s review some of the different types of alternative supplier centric-finance options:

Factoring

With factoring, a supplier sells their invoice to a factoring company in exchange for early, discounted payment. Once they sell the invoice, the supplier typically receives around 80 percent of the agreed upon discount up front. When the debtor pays the invoice, the factoring company will pay the supplier the remaining 20 percent of the money they’re owed minus transaction fees.

Asset-based lending

A supplier obtains a secured loan using all of their assets (e.g., property, equipment) as collateral. Of course the risks here can be sizable in the event of default and it typically only advances 65-80 percent of the assets value.

Peer-to-peer lending

Often called P2P lending, these services allow businesses to borrow and lend money without a financial institution. These are typically unsecured loans and the amount is usually less than $50,000.

Accounts receivable financing

Accounts receivable financing has a lot of similarities to a bank loan. With A/R financing, you as the business owner put up your accounts receivable up as collateral in order to receive the loan. This type of financing is typically less expensive than factoring, however the issuer often requires a high minimum amount of monthly sales to qualify for the loan.

Receivables financing

With receivable financing, the supplier sells their invoices in exchange for cash. In this, payment to the supplier is based on the credit rating of the customer. So there are no cumbersome review processes for suppliers and fees are limited. Payment can be in hand typically within 72 hours.

As you consider early payment of your invoices, examine the overall costs of the various services. While one might seem like an inexpensive proposition with low rates, there might be fees hidden in the fine print that you’ll only find out about down the road.

Early payment of your invoices can be a lifesaver for your business. It can carry you through rough patches or give you the cash infusion you need when you need it. Just make sure to do your homework and select the provider that works best for you.

Source:
https://www.jbs.cam.ac.uk/fileadmin/user_upload/research/centres/alternative-finance/downloads/2017-05-americas-alternative-finance-industry-report.pdf