Chapter 8

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.

A person in construction holds a clipboard and bag of money.

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:

Steps showing how invoice factoring 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:

Text showing how invoice discounting 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.

Invoice financing pros and cons

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.

Disclaimer: 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.

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