Invoice financing is one of the easiest and most effective ways of monetizing outstanding invoices by
allowing businesses to leverage their sales ledgers. Since there are many alternatives to invoice financing
available, it is necessary to understand when the use of invoice financing is most effective for a small business.
In this case, small businesses should consider several scenarios when invoice financing can be essential for a
business for survival and helpful to achieve financial goals and competitive advantages.
1. When urgent cash is needed:
Liquidity is essential in any business to meet operational expenses and short-term obligations. Outstanding
invoices reduce liquidity and store up cash for months. In this case, the small businesses can use invoice
financing when working capital falls below a standard level to collect immediate cash and meet expenses and obligations in time.
2. When there is no high-value collateral:
The small businesses at the start-up phase do not have high-value collateral that is needed for other
alternatives of invoice financing. In this case, the small business can use invoice financing with limited
collateral to unleash cash from outstanding invoices.
3. When customers regularly pay late:
If the small business has customers who frequently pays late, there is a high probability of outstanding
invoices for a longer period. Moreover, if the payment period is above 30 days, it is highly likely that the
customers will hold the invoice for the entire period. In this case, invoice financing would be the best choice
to free up cash immediately.
4. In the case of sustaining valuable customers:
There can be certain situations in small businesses when large customers ask for longer payment periods.
Though the customers will pay late, the small business will be able to make large sales to the customers for
the long-term by agreeing to their terms. However, small businesses would face the risk of a decrease in cash
inflow during the long payment period. In this case, the invoice financing would be helpful to collect cash
before payment of the invoice and retain the valuable customer by providing them with longer payment periods.
5. In the case of capturing new opportunities:
Small businesses are in constant need of growth and financial stability. Hence, it is essential to capture
any new opportunities in time. For this, the business may require immediate funding. However, for a small
business with low sales and cash inflows, investment funding may not be available on hand. In this case,
invoice financing can be a great source to collect funding immediately and invest in the new growth
opportunity for the greater success of the small business.
6. When the business relies on few large payments:
If the small business mainly relies on a few customers who make large payments after long intervals, it can be
difficult for the business to bear the operational expenses before the payments are made. In this situation, the
small businesses can use invoice financing by leveraging the invoices to collect cash to run business operations smoothly.
7. When the business relies on credit sales:
If the business has a higher number of credit sales than cash sales, it can be difficult to maintain a steady cash
balance in the business. The credit sales generate cash after a certain period and during this period, without
adequate cash inflows, the business may fail to cover operational expenses and obligations. For this, when the
business mainly has credit sales and only a few cash sales that are not sufficient for smooth business
operation, it can use invoice financing to free up cash from outstanding invoices for maintaining a stable cash
balance in the business.
In conclusion, invoice financing is a time and resource-saving financing source that can help a small business
to increase cash inflows without bearing high financing costs. In this case, the small businesses need to
understand when is the best time and situation to use invoice financing so that the business can attain
efficiency and effectiveness. If the small businesses face any of the similar scenarios discussed above, they
long-term financial stability and growth.