Invoice financing for small businesses is one of the most common forms of commercial finance. This type of funding lets you sell your pending invoices to a lending company at a discount in exchange for upfront cash. Lending companies typically finance 80% to 90% of your total invoice value. You’ll receive the remaining amount, minus a small transaction fee, once your customers pay their invoices.
Both small and large companies use invoice financing to address working capital needs. If you’re planning on applying for this type of funding, it’s important to know the most common misconceptions surrounding this form of financing.
Myth #1: Invoice financing is only for companies that are on the brink of failure.
Many people think that invoice financing should only be used as a last resort for companies on the brink of failure. However, profitable companies take on invoice financing to further improve their cash flow.
For instance, it can be challenging for startup companies to maintain consistent cash flow during rapid growth. Applying for invoice financing bridges cash flow gaps and gives you the working capital needed to run a successful business. With invoice financing, startup companies and small businesses can utilize their assets (invoices) to meet their needs.
Myth #2: You won’t be able to strengthen customer relationships.
When you decide to finance your invoices, you may need to relinquish control of payment collections. Most of the time, the invoice financing company will be the one to collect payments from your customers, leaving you out of the equation.
However, financing your invoices does not necessarily mean you won’t be able to build relationships with your customers. With the responsibility of payment collections out of the way, you’ll have more time to build and strengthen professional relationships with your customers. Your clients can expect a more comprehensive service and they will understand that you have outsourced the collection of your invoices.
Myth #3: Applying for invoice financing means you have no control over your company.
As previously mentioned, invoice financing is not only for companies who are struggling to generate working capital. While they’re most certainly welcome to apply, financially healthy businesses can benefit from invoice financing as well.
Since invoice financing frees you from the tedious task of collecting payments, you’ll have more time to focus on more important, revenue-generating tasks. In other words, you’ll have more control over your company.
Myth #4: You need to sell your entire sales ledger.
While some financing companies require business owners to sell their entire ledger, most lenders these days give business owners the option to only fund certain invoices. If you have customers who want longer repayment terms or customers who often pay late, you can finance invoices for those customers.
Ideally, you want to choose a payment provider that offers selective invoice financing so you can benefit from the flexibility this funding option offers.
Myth #5: Invoice financing is extremely expensive.
Many business owners overlook invoice financing because they think it’s too expensive. But over the years, invoice financing fees have been gradually decreasing. In fact, invoice financing rates aren’t far off from traditional loan rates.
Additionally, the cost of this type of financing largely depends on where your business is at. While your company grows, it may be a good idea to apply for invoice financing rather than letting attractive business opportunities pass you by.
Myth #6: The financing company will chase your customers for payments.
As mentioned, when you sign up for invoice financing, your customers will know about it since the lender you’re working with will be the one to collect payments. Many business owners are wary about this because they want to remain in control of customer relationships.
However, you won’t be able to satisfy the needs of your customers if you don’t have enough working capital. It’s important to work with a reputable financing partner that truly cares about your customers and your business.