Clients paying late? Here's how invoice finance can help

Suppliers tapping their toes? Late payers can put massive pressure on your business, and when you have bills to pay yourself, waiting isn’t always possible.

Invoice financing (also known as debtor finance) is a great way for B2B businesses to manage late payments. Could it solve your cash flow problems once and for all? Let’s explore.

What is invoice finance?

Late payments from clients can have a ripple effect, straining cash flow and sometimes even jeopardising your relationships with suppliers. History has plenty of examples of businesses that went under despite turning a profit, simply because they ran out of money while waiting for their invoices to get paid.

This is where invoice finance comes in. Designed to bridge gaps between incoming and outgoing payments, invoice finance allows you to access funds tied up in outstanding invoices and cushions the impact of late payments on your business.

How does invoice finance work?

Invoice finance allows you to leverage your unpaid invoices and free up cash flow, using accounts receivable as collateral.

How? Your lender will pay you a percentage (usually 80%) of the amount the customer is owing on each unpaid invoice. This means you can pay suppliers on time without disrupting cash flow while your lender takes on the debt. When you’ve received your invoices, you can pay your lender back over a longer, more favourable term.

There are two types of invoice financing—invoice factoring and invoice discounting. The key difference between them is in the level of control your lender has over your sales ledger.

Invoice factoring vs invoice discounting

With invoice factoring, your lender purchases the unpaid invoices outright, which enables them to handle payment collection directly. They may call your customer to request payment when deadlines come up and pursue any further collection processes. Once your customers pay, you receive the remaining balance of the invoice, minus the cost of the factoring company's services.

With invoice discounting, on the other hand, you get a loan secured against your outstanding invoices. You continue to manage the collection of payment from the invoiced customer, and the lender trusts you to chase down the invoice and make sure it’s paid. Once your customers pay, you repay the loan, plus the service fee.

We can help you decide on the best type of invoice financing for your needs. Chat with a lending expert today for a personalised overview.

Benefits of invoice finance

Invoice finance helps to keep things moving within your business and beyond. Here’s a snapshot of the key benefits:

• Bridge gaps between incoming and outgoing payments to keep your suppliers happy;
• Maintain healthy cash flow and manage invoices more easily;
• Pay your lender back over a longer period and more favourable terms;
• Avoid bottlenecks and the stress of chasing up late payments;
• Avoid late fees and other penalties from suppliers.

Drawbacks of invoice finance

There are also cons associated with invoice financing, which you should consider when deciding whether this type of business loan is right for you:

• Your customers must be seen as likely to pay;
• The annual costs can be higher than other options;
• You might lose some control over your accounts receivable;
• Customers may be notified in some cases;
• Minimum sales volume may apply.

Industries that commonly use invoice finance

Invoice finance is particularly useful for businesses in industries like:

• Manufacturing, to cover delays in client or supplier payments;
• Construction, to balance large-scale projects and long payment cycles;
• Trucking, to cover long-term contracts or costs like fuel, maintenance, and staff expenses;
• Recruitment, to cover potential delays in client payments after paying staff and contractors upfront;
• Sole traders, to provide them with more flexibility without the need to take out personal loans or business overdrafts.

Tips for managing late payments from clients

These are some tips that can hopefully help you manage or prevent late payments from your clients:

Offer a discount

One way to encourage late-paying clients to get on top of things is to offer a cash incentive. Slash a percentage off your clients’ total bill to say “thanks” for paying early.

Get your invoices out ASAP

By giving clients ample time to pay their bills, you’re setting them up for success. Being organised won’t necessarily guarantee being paid on time, but it will pave the way for clients to follow suit.

Set up an automated reminder

A few days before invoices are due, send out an email or text reminding clients that payment is due. This keeps your business front of mind and helps to minimise the occasional slip (we’re all guilty of this from time to time). Using an accounting software tool can come in handy here, instead of having to do this manually.

Investigate what’s going wrong

If a client consistently pays late, there could be a valid reason. Encourage them to be open and honest about what’s holding them up so you can help them find a solution, or at least do your best to help. For example, setting up a regular payment schedule could resolve issues around meeting deadlines.

Take back control

Things happen. You can’t control late payments from clients, but you can apply for invoice finance with Valiant Finance to bridge gaps in cash flow. No more chasing up late payments, stressing over looming deadlines, or relying on clients to keep things moving.

What's the difference between invoice finance and trade finance?

The main distinction is that invoice financing is typically used for domestic transactions as a way to address immediate cash flow needs, whereas trade financing is designed for international or cross-border trade. It allows you to spread costs over time while still being able to benefit from discounts and lower shipping per unit.

If you're looking for a way to buy stock in bulk or fund large international orders, trade finance may be a more suitable solution than invoice finance.

What's the difference between invoice finance and line of credit?

As we know by now, invoice financing enables you to tap into cash from unpaid invoices, using accounts receivable as collateral, which means you get quick access to working capital. A business line of credit, on the other hand, is a flexible safety net that lets you access funds as needed, paying interest only on what you use.

Invoice finance is a bit more specific—for businesses with outstanding invoices—while a line of credit is typically more versatile and used for a variety of financial needs.