Does outstanding accounts receivable frustrate you? Well, let us tell you, you are not alone. Close to 60% of invoices are paid after the due date and more than 20% after two weeks. This can lead small businesses short on cash, make it difficult to pay for their business expenses, and lose out on opportunities. While you can manage them all with online invoicing software, invoice financing and factoring can help you deal with slow cash flow.
This blog will list out the similarities and differences and help you make the right business decision.
When you borrow money against invoices, this practice is known as invoice financing. Usually, companies taking care of this will give you 80-90% of the payment upfront. Once your client clears your payment, you can then pay the lender back. In this case, you will be responsible for collecting dues and following up with clients.
In some cases, the finance provider may offer to become a part of your accounts receivable systems. So, when your client pays, they might deduct their fees and then forward you the balance.
Invoice financing is ideal for businesses that need money quickly and are confident that they will receive the payments. While this can be a lot to digest, you can manage all the financial aspects with your online invoicing software.
If you are a supplier and you send a $5,000 NET 30 invoice, your client will have a month to pay you. But, you might need to give out salaries and pay suppliers too. So, they pay you an advance of $4000 (i.e.) 80% of the invoice upfront.
Now, you will need to keep following up with your client. Once they pay you, you send $4150 to the invoice financing company and keep the $850 for yourself. So, you receive 97% of the fees, and the financing company receives $150 in fees. To keep all things in line you can use free accounting software for business and never worry about missing a detail.
Invoice factoring is a twisted form of invoice financing. An invoice factor purchases the accounts receivables, gets in touch with your clients, collect the final payment, takes their cut, and sends you the remaining money.
You will get the invoice amount upfront with invoice factoring, and you will not need to worry about cash flow. Since they will be dealing with the clients, you will save a lot of time, which can be used for better business discussions and other processes.
Accounts receivable factoring is ideal for businesses that get their bills cleared within 60-90 days or longer. It is also ideal for small businesses that don’t want to get into the hassle of recovering outstanding receivables on their own. But please remember if you are offloading responsibilities, invoice factoring is far more expensive than invoice financing. The factor takes into account that your customers might not clear the invoice, and thus they charge more.
So, if you use invoice factoring, make sure you keep all records safe in your free accounting software for business and also decide if you are ok with someone handling your interface. Also, keep a thorough check on your invoice factoring company and if they can actually contact your customers or not.
Let’s say you are a wholesaler and have sent a NET 30 invoice for $5000. So, if you need to get your payments cleared fast, you can contact an invoice factoring company. They purchase your invoice and send you a $4,250 upfront payment.
Later, the factor follows up with your client to collect payments. If the client pays you before the deadline, they will send the payment directly to the factoring company. Post that, the factor will deduct 4% of their fees and send you the remaining $550. Thus, in total, you receive $4,800, and the factor receives $200 in fees.
This was all about invoice financing and factoring. Free accounting software for businesses can help you manage both with ease and get going. While in one case you need to follow up, the second will take off the burden of your shoulders. So, take that plunge and give your business the best gift- online invoicing software.