Using Your Unpaid Invoices to Avoid Insolvency and Bankruptcy

Posted on: 26 September 2016

When it comes to financing a small size business, you are sure to find that there are a lot of challenges that you will face as an entrepreneur. The most common option that people will resort to would be to look for funding from their bank of choice, and this will typically be in the form of a loan. The disadvantage of loans is that they tend to garner interest whether or not your business is making money, and thus this could still lead you down the path of insolvency and bankruptcy. If you would like to avoid this, you have the option of invoice financing. So how can you use your unpaid invoices to inject money into your business?

Invoice factoring

This is an option that is gaining popularity for businesses that may need hard and fast cash yet have most of their profits tied up in receipts as well as invoices. So how does this process work? If you are exploring this route for the first time, you could start by handing over some of the invoices to the factoring company. Typically, the company will offer you a majority of the total money they collect while keeping a percentage as their commission. Once the terms have been agreed upon, they will then take the invoices and resume total risk on any defaulted invoices. This avenue is of great convenience as it offers entrepreneurs the chance to improve their cash flow without having to wait the standard amount of time before the customers have to clear their invoices. In addition to this, you can be assured of getting all the money owed to you in the shortest time possible.

Invoice discounting

Although similar to invoice factoring, invoice discounting differs in a few ways. So how does this type of invoice financing work? As you would usually do, you will raise an invoice to the customers who purchase your goods and services. This should be done on your regular company stationery. Once it has been sent to your customers, you then present a copy of the invoice to your financial provider. This should be done subject to each individual circumstance. The main difference with invoice factoring is that the obligation to follow up on payments of the invoices remains squarely on your shoulders and not the financial provider. Thus, with this type of discounting, you remain in full control of your credit as well as all payment collections that will be done from your customers.