According to the well-known statistic, 90 percent of startups and SMBs fail within their first five years of doing business. Reasons behind this are numerous, but the most common one is that they simply run out of work capital. In order to avoid this, SMBs need to find a way to improve their cash flow, which is all but easy seeing as how they might barely be profitable (if at all).
Taking another credit is also not an option, due to the fact that you probably had to take one to get started in the first place, which is why your credit rating isn’t admirable at the moment. Luckily, there is one more method you might want to try out – the invoice financing. Here are four things you need to know about this idea, as well as a few reasons why invoice financing might be particularly well-suited for SMBs.
1. The problem with credit payments
In order to even start discussing the suitability of this idea, we first need to ask ourselves why are these invoices problematic in the first place. When you start selling your product/service, most people won’t pay in cash, or even right away, but will opt for the short-term less expensive option – the credit payment. For you as a business, this means that although you have earned some profits, it might take months to finally receive the entire amount. Unfortunately, you need to pay for your workforce and the supplies that were used right away, which puts you in a kind of an odd spot.
2. Invoice financing to the rescue
Once your business hits off and you have enough of these invoices coming in on a regular basis, this shouldn’t be a problem but for now, the situation may seem as a dead end. Luckily, some companies are willing to buy these account receivables from you for a minor price reduction. We are talking about 1,5 to 5 percent of the original value of the invoice. Furthermore, if you find a company operating in your region, you will probably receive the money within the next 24 hours. For instance, a company from NSW or Victoria might want to look for someone dealing with invoice financing in Australia, rather than look for a partner further away.
3. You don’t need the collateral
Perhaps the greatest advantage that this kind of capital injection influx brings is the idea that you don’t need the collateral in order to get the money. Here, your account receivables are your collateral instead, which puts you on a much safer ground. This also means that the risk for your business is considerably smaller than if you were to take a credit. Furthermore, it is the invoicing company that takes all the risk, seeing as how they are the ones who are now required to collect the remaining payments from your debtors.
4. Avoiding other methods
Finally, while there are some other methods of providing your business with a capital influx, most of them have some serious disadvantages you simply can’t afford to disregard. Creating another stream of revenue takes too much time and energy. Selling a personal asset is always unpleasant while selling an equity in your company always costs you more in the long-run. Not to mention that it robs you of the control over your own project.
Of course, invoice financing has its own downsides. For instance, a lot of people aren’t even aware that it exists, which, naturally, makes them quite suspicious of the idea when they learn of it. Next, it might not even be available or equally well-represented in every part of the world, which is quite troublesome on its own. Still, once you take all things into consideration, it becomes more than clear that the benefits outweigh downsides by far.