An alternative to traditional loans
Businesses that are getting low on cash can take out a working capital loan, but many find it hard to go through the process of applying and waiting for approval. It could be faster and more flexible to use invoice financing. This option works well for businesses that invoice customers and are owed money by them.
There are many forms of invoice financing, but the two most common are invoice factoring and invoice discounting.
What is invoice factoring?
Instead of waiting on customers to pay your invoices, you can take the invoices to a factoring company. Here’s how it works:
What is invoice discounting?
Invoice discounting is another way to generate instant cash from your invoices. But with discounting, you retain ownership of the invoices. Here’s how it works:
When selecting an invoice financing provider, ask what happens if the customer doesn’t pay. In some cases the finance company may take the hit. In others, it may fall to you.
Faster invoice financing
Invoice financing can be processed online using your invoicing or accounting software. You flag the invoices you’d like to finance and the provider assesses the application in a couple of days (or even a few hours). These online services will also send automatic updates to your accounting software with details of part payments and fees on each invoice.
Waddle, a Xero owned company, can provide invoice financing and integrate with your accounting software. It generates a real-time credit limit based on the value of your invoices.
What is cash flow financing?
Cash flow financing is similar to invoice financing. But instead of selling invoices, the business gets a loan backed by its expected cash flow.
This allows a business that’s reliant on cash to get funds immediately to meet needs it wouldn’t normally be able to afford. For instance, a party supply store might have the opportunity to buy a bulk load of balloons at a discount price – but it must pay cash immediately. It usually wouldn’t have enough cash to do this until the 15th of the month when a couple of big party planner customers make regular purchases. It gets a short-term cash flow loan to cover the balloon purchase, then repays it when the cash comes in.
Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the provided content.
How to finance your business
Need finance for your business? Learn about the types of finance, approaching lenders and investors and more.
- What is business finance?
Your new business idea is ready to go. Now you need to find the right small business funding. But where do you start?
- How much business funding do you need?
Knowing how much money you need will help you choose the right type of finance. These tips will help you find a number.
- Debt versus equity finance
Most forms of funding fall into one of two camps. Let’s look at the main pros and cons of debt versus equity.
- Main types of finance
It takes money to make money. So what sort of finance options are there? Here are the types that fund most businesses.
- How to get a business loan
Getting a business loan is still one of the most common ways to finance a business. So let’s look at how to get one.
- Peer-to-peer lending
Peer-to-peer lending is an alternative method of getting a business loan. How does it work?
- Friends and family loans
Friends and family loans may be available when other types of finance aren’t, but they do require some precautions.
- Invoice financing
Ever thought your cash flow would be better if everyone just paid what they owed you? Well, you may not have to wait.
- How to find investors
How do you find investors for equity financing? Let’s look at what types there are and where to locate them.
- Angel investors versus venture capitalists
Angel investors and venture capitalists are alternative finance sources. What can they offer your business?
- How crowdfunding works
Crowdfunding can get you money to build a business, and the attention to build a customer base.
- Small business grants
Grants are a great funding option for some businesses. They can be a lot of work to get, but the reward is free money.
- Pitching for business funding
Seeking business funding is a major step but you needn’t be daunted. Here’s how to pitch your business.
- Tools and guides for your business
Now that you’re in business, you want to stay there. Xero’s got resources and solutions to help.
Download the guide to financing your business
Your intro to the different types of finance, including their pros and cons. Fill out the form to receive our finance guide as a PDF.