Invoice financing is one of many ways for businesses to generate cash quickly. Essentially, a business can ‘borrow’ against their accounts receivable (or unpaid invoices). Finance companies that offer invoice financing will provide cash for the majority of the money owing.

There are a few different options when it comes to invoice financing. Let’s take a look at the most common options, thanks to Xero’s helpful invoice financing guide.

How does invoice factoring work?

The key thing to understand with this option is that invoice factoring involves selling, and losing ownership of your invoices.

  1. Invoice your customers,
  2. Sell your invoices to the finance company (this third party is known as the factor),
  3. The factor will provide you around 80% of the value of the invoices in return for purchasing your invoices,
  4. Your customers will pay the factor when the invoice is due,
  5. Once all invoices are paid, the factor will send you the remaining invoiced funds, less their factoring fees.

How does invoice discounting work?

Invoice discounting allows you to access cash against your invoices, but retain ownership of your invoices.

  1. Invoice your customers,
  2. Send the invoices to the finance company who will confirm what percentage of the invoice they will lend you,
  3. The finance company will provide you a lump sum payment or a line of credit for your business to access,
  4. Your customers will pay you when their invoice is due,
  5. You repay the finance company the amount they lent you, plus their fees and any interest accrued.

Invoice financing can be conducted online by using your accounting or invoice software and connect to the finance company to provide finance quotes and details of the fees and/or interest you’ll incur.

The issues and impacts of invoice financing

When businesses struggle with slow payers, or unpaid invoices, the cash flow effects can be felt relatively quickly. Not to mention the additional admin time involved in debt recovery. This scenario can force some businesses to explore alternative financing options, such as invoice factoring or invoice discounting.

Here at IPromise, we have a fundamental problem with suppliers needing to pay more money to collect their money. We also take issue with the fact that invoice financing pushes the responsibility and burden of debt onto the business or supplier, who has legitimately done the work requested, rather than the client or customer who should pay the invoice in a timely manner. This doesn’t fit our ethos of fair payments!

Businesses who do choose to access invoice financing, are stung with fees, commission and sometimes interest payments (for invoice discounting), so they never realise the full value of their invoice and the work they’ve completed. On an annualised basis, including fees, charges and interest, the interest rate for invoice finance can be as high as 25%. If a business needs to invoice finance on a regular basis, they lose precious profit margin, or they may need to increase their rates or fees to cover the cost of invoice financing – no one is winning here except the finance company!

Businesses need to understand up front that old unpaid invoices will not likely be covered by invoice financing, or if they are, may incur higher fees by the finance companies as the chances of recovering the invoice are reduced.

The act of selling invoices to a finance company to access invoice factoring means more fees and you’ll lose control of the relationship with your client or customer. If you can’t control the debt collection process of your invoices, your customer or client may choose not to work with you again if they don’t think they’ve been treated fairly.

From our perspective, one of the worst outcomes of invoice financing is when businesses start to rely on it as a source of regular funding, rather than fixing their underlying cash flow issues – such as slow payers! Reducing debtor days should be a focus for all business owners and finance managers.

How can IPromise improve your cash flow management?

We consider ourselves your fair and secure payment partner. We help businesses ensure their customer payments are guaranteed and paid when work is completed.

If you’re a supplier considering invoice financing, take a look at our solution that will help you get paid when the agreed service is completed. Getting paid is the most important part of your business. Business plans, marketing plans, project management software, accounting software, even the service you provide don’t mean anything if you don’t get the money you deserve for your honest day’s work. To put things simply, no money, no business.

IPromise has the supplier’s interests at heart. We’re motivated to improve cash flow for businesses, reduce their admin time and facilitate simpler, immediate project communication between suppliers and their customers. We also fairly protect client payments, so they can have the reassurance that their money is safe, and suppliers paid once work is completed.

If you’re sick of cash flow headaches, the IPromise app and its 100% secured customer payments, before the job begins, is a game changer. The reassurance that you’ll be paid immediately after the agreed job is completed can enable you to get on with doing the parts of the business you really enjoy. And who doesn’t want less admin?

IPromise conveniently integrates with Xero accounts, automatically copying IPromise approved quotes/invoices into Xero to reduce your payment administration time by up to 80%.

Whether you work in Professional Services, Construction, Consulting, Manufacturing, or any other service-based industry, IPromise will add payment security, improve cash flow, reduce administration time and enable open, easy communication for your projects.