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How to use invoices for funding
What is an invoice? If you are a small business, you likely already know the answer to this, but to be clear, it is an obligation to pay from an account debtor. Your business has provided a good or service to a customer, and they are now in your debt, and owe you money for that good or service.If your company is invoicing clients, and extending credit for the work you are doing, then you are essentially becoming a banker, and lending money to a customer. This money is usually lent interest free too for a specific time period. What happens is that many of the customers wait a long time before paying on the invoice, which can put small businesses in a difficult position when it comes to cash flow. In order to remedy this problem, consider using invoices for collateral to get some cash flow. In order to use your invoices as an asset there are two conditions that have to be met. These conditions are set by the financing companies: First, the goods or services must already be delivered and completed. In other words, the customer has to sign off that they are satisfied with the job they hired you to do, or are happy with the products provided. This can be a verbal approval, but in writing is always better. If the work is started, but not finished, then it will not be able to be used as collateral in an invoice financing type situation, called AR financing, or accounts receivable financing. The terms of the deal have to be clear, and the work complete. Second, the borrower (customer, etc.) has to be credit worthy. In other words, when using invoices for funding, you are essentially selling the right to collect on the debt, and keep all that is collected. The financer buys the invoices at a fraction of the cost, maybe at 70%, and they get to profit by keeping the additional 30% they collect. These numbers are variable and subjective, every finance company has different ways of determining percentages, but the biggest factor is whether or not the invoice can be used as collateral, and that is determined by the credit worthiness of the one who owes. Thus, it is important for your business that if you want to use invoices as collateral, and if you want to stay in business, that you only extend credit to those that are worthy of it. If they are, invoices become a valuable asset that can be leveraged when cash is needed, and can help your business grow. |
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