How To Use Invoice Financing To Offer Credit Terms

For many business owners, waiting 30, 45, or even 60 days to get an invoice paid can be a challenge. However, most commercial sales include credit terms giving clients up to two months to pay an invoice. As a small company, you have little say in the matter. Large companies are notorious for demanding long credit terms from vendors as a condition of doing business.

Offering payment terms has risk

If you offer 30-day payment terms to corporate clients, you risk two problems. The first problem is a cash flow shortage and running out of funds while waiting for payment. This scenario can happen if your company is growing quickly and you have ongoing expenses.

Another problem is the increased risk of bad debt, resulting from clients who receive your product/service but are unable or unwilling to pay your invoice. Obviously, bad debt hurts your business financially.

Not offering terms is also risky

However, not providing terms to clients also carries the risk of losing business. Many large companies simply refuse to work with you if you don’t provide commercial credit terms. They’ll go to one of your competitors, who can surely provide them with the credit they want.

This dilemma leaves you in a catch-22: you have risk if you offer terms and you have risk if you don’t. Fortunately, there is a way to handle it.

Use a balanced approach – offer credit where it’s due

You should offer credit terms only to clients with the financial capacity to pay you back. This strategy reduces your chances of getting stuck with a bad invoice and a write-off. It’s a good policy to provide terms only to clients with good commercial credit.

However, this policy leaves one issue open: what do you do if you can’t afford to offer terms to clients who have good credit? The answer: consider financing your invoices.

Invoice financing enables you to offer credit

Financing your invoices allows you to offer credit terms to commercial clients because it minimizes the problems associated with slow payment. The financing company provides you with an advance payment and then holds your invoice until your client pays. This solution gives your small business immediate funds to pay for expenses and take on new projects. The transaction settles when your clients pay on their usual terms.

When used strategically, invoice financing improves your cash flow and lets you offer terms to clients. If you have been turning away sales because you were unable to offer terms, financing your invoices can be a game-changer.

Is invoice financing right for me?

Using this type of financing helps only if your primary financial problem is that your clients are taking too long to pay and the delay is creating a financial problem for your company. If you are looking for a financing solution, read our article on how to select the best factoring company for your business.

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