Customers don’t always pay on time, and when you’re a small business owner this can create problems for your cash flow. Using unpaid invoices to access working capital is a method favoured by many businesses, and when done correctly is a powerful tool for enabling your business to grow.

For those that may not be familiar with invoice financing, it allows businesses to sell their unpaid invoices. Typically, the business gets paid up to 85% of the value of the invoice being financed. Once the invoice has been paid, the provider will send on to the business any remaining money over what has been financed, first deducting interest and any other charges.

Although invoice financing can be a good way to obtain funding for working capital, it is important for business owners to understand that not all offers are equal. Unfortunately, there are some invoice finance providers that use the complexity of the service to hide costs and lengthy contract periods with high minimum usage costs.

These are some ideas to keep your business from entering into an expensive contract:

  1. Do not allow sophisticated jargon to confuse you. Demand clarity on everything and make sure you sign nothing until you understand the terms. If you do not agree with the terms do not feel pressured to accept an offer, no matter how badly you need the funds.
  2. Do not be swayed by headline rates, always ask for an APR. If the finance company does not give you a straight answer, it is probably more expensive than they are implying. There may be hidden charges that are not obvious from the headline rate alone.
  3. Read all terms and conditions thoroughly, and understand how this financing may affect your relationship with your customers. You may lose control over your invoices and find the finance provider is chasing your customers for payments, souring your relationships.
It is understandable that businesses may need quick access to working capital from time to time, and invoice finance can be a great way to accomplish this. If you are in control of your invoices and the relationship with your customers, and understand the costs clearly, then invoice finance could make a positive difference to the cash flow in your business.

By Greg Carter, Co-founder, Growth Street