5 mins read
A mobile banking app displayed on a smartphone screen, allowing users to manage their finances on the go.

What is invoice financing?

Invoice financing for small business is a common method of financing for small businesses. Also known as business invoice finance, it provides access to immediate cash funds. The process involves a small business selling their outstanding invoices to a third-party financing company. The lender provides this service for a fee, usually a percentage of the small business invoice value. This gives the small business a way to boost short-term cash flow while they wait for customers to pay them.  

How does invoice financing work? 

Whilst there are many different funding options for small businesses, invoice financing is a popular one. CreditorWatch Collect customers have fast, easy access to invoice financing within the app.  

Step one: Sign-up 

If you haven’t already, sign-up to CreditorWatch Collect. You can try it for free for 14 days.  

Step two: Link your accounting system 

Follow the instructions to link your CreditorWatch Collect app with your accounting system (for example Xero, QuickBooks or MYOB). This is quick and easy to do.  

Step three:  

Review your outstanding invoices. If you see any with a green ‘FINANCE’ tag on the right-hand side, you can click the ‘Apply’ link to start the invoice financing process. As you hover over the ‘FINANCE’ tag by the outstanding invoice, you’ll be shown how much you’ll pay for financing that invoice. Fundtap finances up to 90% of an invoice.  

Step four: 

After clicking on the ‘Apply’ link, you’ll be taken to the Fundtap website. Fundtap is a partner of CreditorWatch Collect that provides a third-party invoice financing service. If this is your first application for invoice financing, you’ll be asked to set up an account with Fundtap. Fundtap will then review the invoice and approve your application to borrow funds against it. 

Step five: 

Check your bank account, the funds are usually deposited into your account within hours. 

Step six: 

After the invoice due date, the amount advanced plus the associated fee will be direct debited from your account. If your customer pays you early, you can choose to pay back the invoice loan early with no penalty fees. 

When do small businesses use invoice financing? 

Invoice financing is most used when a small business needs to boost their cash flow on a short-term basis. Reasons for this can include: 

  • Financing for a new business or growth opportunity 
  • Covering costs (such as salaries and rent) while awaiting payment from customers 
  • Paying suppliers on time and avoid costly penalties or risking supplier relationships due to late payment 
  • Managing fluctuations in revenue due to seasonal business 

Key benefits of invoice financing? 

Key benefits of invoice financing for small businesses include: 

One: Improved Cash Flow: 

  • Access to immediate funds: Invoice financing provides small businesses with quick access to funds by converting their unpaid invoices into cash. 
  • Overcome payment delays: By receiving a significant portion of the invoice value upfront, businesses can bridge the gap between invoicing and actual payment, ensuring a steady cash flow. 

Two: Working Capital Management: 

  • Flexible funding option: Invoice financing allows businesses to choose which invoices to finance, giving them control over their working capital and enabling them to meet immediate financial needs. 
  • Eliminate payment uncertainty: By transferring the risk of non-payment to the financing company, businesses can reduce uncertainty and focus on their core operations. 

Three: Business Growth Opportunities: 

  • Seize growth opportunities: With improved cash flow, businesses can seize growth opportunities such as expanding operations, purchasing inventory, or investing in marketing and sales initiatives. 
  • Avoid debt accumulation: Unlike traditional loans, invoice financing does not create additional debt on the balance sheet, allowing businesses to grow without incurring long-term liabilities. 

Four: Improved Creditworthiness: 

  • Strengthened supplier relationships: Timely payments to suppliers using funds obtained through invoice financing can enhance business credibility, provide access to prompt payment discounts and help foster stronger relationships with key suppliers.  
  • Potential for higher credit limits: With a consistent cash flow and improved financial stability, businesses may be able to negotiate higher credit limits from suppliers, facilitating future growth. 

Five: No Collateral Requirements: 

  • Unsecured financing option: Invoice financing is typically unsecured, meaning businesses do not need to provide collateral such as property or assets to secure the funding, reducing risk and simplifying the application process. 

Six: Fast and Convenient Funding: 

  • Quick approval and funding: Compared to traditional financing options, invoice financing offers a faster approval process, enabling businesses to access funds within days or even hours. 
  • Minimal paperwork: The application process for invoice financing is generally straightforward, requiring minimal documentation, making it a convenient funding option for small businesses. 

Seven: Enhanced Financial Stability: 

  • Stable cash flow management: By ensuring a consistent inflow of funds, invoice financing helps businesses maintain stability during periods of uneven cash flow or seasonal fluctuations. 
  • Mitigated late payment impact: Late payments from customers can disrupt a business’s financial stability, but invoice financing mitigates this risk by providing immediate access to funds, even if customers delay payments. 

What are the risks of invoice financing? 

One: Reputation and customer relationships: 

  • Depending on how or if invoice financing is communicated to customers, there is a risk that it may negatively affect the business’s reputation or customer relationships. Some customers may see the use of invoice financing as an indication of financial insecurity and be wary of continuing to trade. 

Two: Reliance on invoice financing: 

  • It can become easy for a small business to become overly reliant on invoice financing. If you need to access large amounts of funds via invoice financing on a regular basis this could be a sign that your business model needs a rethink, or you need to review your small business payment terms. Take a step back and ask, what would happen if the invoice financing provider was in financial difficulty? How would that impact my business’ viability? 

Three: Cost of financing: 

  • Accessing funds whether through a loan or invoice financing always comes at a cost. A small business must weigh up the costs of financing invoices versus the short-term gain from a cashflow boost.  

Four: Contractual obligations: 

  • As with any sort of financing, you’re entering into a contractual agreement with the provider.  To avoid financial or legal implications if things go wrong, you should carefully review the agreement and ensure you are happy with all requirements and can comply with any obligations.  

Avoiding the bad debt cycle 

If you’re considering invoice financing for your small business, it might be time to dive deeper into your collections process. Many times, you can avoid the need to use third-party financing through a properly structured, consistent approach to your accounts receivable. CreditorWatch Collect is an automated accounts receivable tool which helps you set up a consistent, automated collections process. It reduces time spent on manual collections tasks, chases your customers in a friendly but direct manner and ultimately gets you paid faster. Cost-effective and easy to set up, it’s a long-term solution to boosting cash flow without the need to seek external financing. The bonus with CreditorWatch Collect is that whilst you’re improving your collections rate, the app provides easy access to invoice financing if you do need a short-term cash injection to tide you over.  

Chat to our team now to learn how CreditorWatch Collect could help you breathe easier and get you paid faster. 

Lucy Stewart

Trade Consultant – Debtor Logic, CreditorWatch

Lucy joined the CreditorWatch marketing team in October 2022. With experience across government, media and SMEs she loves working with companies like CreditorWatch that enable businesses large and small to improve their processes and work smarter.
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