Giving money after 30 days, 60 days, 90 days, or even 120 days is a market norm when we look at a business in B2B (business-to-business) buying and selling. Every company has the policy to give credit to the buyer, unlike in B2C (business-to-consumer), where a buyer pays immediately after making a purchase.
When you are operating in a B2B environment, giving credit is a must. This means that you give your product to your client right now, and he will pay you back after the agreed number of days are gone. This activity allows the seller to acquire clients but put a lot of financial pressure on the seller as he has to pay for everything right now. This action sometimes gets the seller into real trouble.
Invoice financing is a great way to control the cash flow of business. When you have an account receivable of $150,000/- and you will get it after 60 days, how can you survive? For this, the recommended way is to opt for invoice financing.
Suppose, if a company has issued and invoice worth $150,000/- and will receive the money-back after 60 days, that company is now $150,000/- short of cash. If it needs the money immediately, what can it do? It can go for Invoice financing. But is the right decision? Well, the company can see it by using the invoice finance calculator.
What is invoice financing?
Invoice financing for a layman is simply getting the money valued up to 90% of your account receivable based upon a valid invoice. The definition means that you will be able to get up to $135,000/- which is 90% of your invoice value of $150,000/-.
So do you want to get financed based upon your invoices? For that, let me share with you ten tips for efficient invoice financing:
Read the following tips very carefully because you have to be very careful in this regard. Otherwise, this financing model can harm you and your business cash flow instead of helping.
- Have an accurate invoice: Having a correct invoice is very crucial for any business, and if you are going for an invoice financing option, this thing becomes more important. The reason behind this is simple. You are going to get money based upon the invoice, and if your invoice is wrong, the application for invoice financing can be rejected, or you might get a small amount compared to what you needed. Hence, it is advised to have a correct invoice first. Because this is your first step.
- Correct account details: On a B2B invoice, you have customer details like Sales tax number, Bank account number, and much more. Most of the financers either require the account number which you control or that account number on which they can have an eye on. Why? The reason is simple. They are lending you money valued up to 90% of your invoice value upfront, so they want to make sure that when you pay them back when you receive your receivable plus the markup upon the money which you agreed upon the time of borrowing.
- Hunt financer as per requirement: Where invoice financing is a great option, it can also become the worst option for a business just because of a wrong financer. Every financer is different. They all have their terms and conditions. You can end up paying a huge amount for the same service compared to someone else with the same amount of money borrowed. So select your financer very carefully.
- Get invoice insurance first: It is a great way to safeguard yourself from a disaster. If you gave a credit of 60 days to a company upon an invoice of $150,000/- and get it financed up to 90% or $135,000/-. It is a huge amount to be in debt, especially for an SME (Small and Medium Enterprise). Your lender will ask you to pay him back the money you borrowed. In this case, you will be stuck. So what to do? Apply for invoice insurance first. By this, if your client got bankrupt, you can pay back the money by getting the money from the insurance company.
- Use the money wisely: What is the point of getting your cash flow stable, but you spend the money upon things which do not help your company grow. Invoice financing is a great option to opt for, but you have to use the money wisely so that you can have an access amount of money in the future, and your company grows. So use the money wisely.
- Keep all your documents ready: Most of the small business owners just quickly apply for the invoice financing by thinking that they only need the invoice. However, for invoice financing, you need to provide a copy of your contact with your client, your order book, full company detail, account receivable book, and many more. If you do not have this ready, your application can be rejected. Otherwise, you can get money as quickly as 48 hours.
- Inform customers regarding financing: It is recommended to tell your clients that you are raising funds based upon the invoice you have issued against their purchase. The reason is, the financer will check the background before giving you money, and for that, the easiest way is to call the client and ask about it. By this, your client will eventually get to know. Most of the small business owners think that this is a bad option to tell. But in general, it is a good option because it increases the trust and confidence of a client on you. After all, they will know that the supplier they are working with is going to be financed when needed to fulfill their needs.
- Read the terms and conditions carefully: It happens with many people that in excitement or under pressure, they forget to read the terms and conditions and sign the contract. This might result in having them pay money, which is not in favor of them. Hence if you are applying to any kind of loan or borrowing, do not forget to read and understand terms and conditions before signing them.
- Keep in mind your return policy: Till now, we have talked about just selling and receiving the money based upon the invoice value. What about returns? If you generate an invoice of $150,000/- and a credit of 60 days. After this raised funds according to the invoice but after 15 days customer retuned the product of worth $100,000/-. Now, what will you do? You have $100,000 extra upon which you are going to pay interest. And the client will pay only $50,000/-. You will be stuck. Hence keep this in your mind before applying for invoice funding.
- Have fixed terms and conditions: It is advised to always have fixed terms and conditions before borrowing any money. Because this lets you have cash flow as per your requirement. Many business owners forget to negotiate and end up paying more than they could afford. Hence do negotiate when borrowing.
When we talk about B2B businesses, they receive money at the end of either 30days or 60 days or 90 days or even 120 days. But what about the expenses for which they have to pay? Now, this makes a business stuck. So to ease out the cash flow requirement, there is a service called invoice financing. But to have an efficient finance invoicing, see the tips above like: keeping return policy of your company in mind or have all the papers ready and so on. But remember, this might look very good for your business but do look for the pros and cons of your choice.