It’s an unfortunate truth that many customers pay invoices well after the ‘standard’ 30 days. For large organizations with strong negotiation power, their standard payment terms can be 60 days or more. Some companies pay late because they are dealing with their own cash flow issues. For others, unfortunately paying late is part of their company culture.

When you are an SME owner, this can be a major headache – chasing up payments for days or weeks, worrying about the impact of late payments on your cash flow, coming up with creative ways to keep the lights on when times are tough.

Revenue doesn’t mean much if the cash does not hit the bank account.

All of these factors put a huge strain on SMEs’ finances and the people working there. And with over 4.5 million people in the UAE working for an SME*, that’s a lot of stress for a lot of people.

In this article we will talk about a tool SME business owners can use to help mitigate some of these strains. Invoice financing, sometimes called invoice discounting.

What is Invoice Financing?

Quite simply it enables your business to receive money due on your invoice now, not when your customer decides to pay you.

How Does It Work?

You send your invoice to the company that offers invoice financing as a service. The company will look at a few things, such as:

  • Have you been paid by this company before? If you have been paid many times before by this company, it’s likely it is that you will be paid again
  • Which company is paying your invoice? Invoice financing companies want to understand how creditworthy your customer or supplier is. Might your supplier go bankrupt and never pay you?

When these hurdles are cleared, usually a percentage of the invoice will be paid out, most companies cap how much they will lend on an invoice. This is usually between 50% to 90% of the invoice value.

You select when you want to repay the loan, typically between 30 and 120 days.

And don’t forget, there is a fee from the invoice financing company, which should be made very clear to you before you make your decision.

Let’s use an example of 5 simple steps:

Step 1: I have an invoice I sent to my customer for AED 100 (we like to keep the math simple 🙂 ). My customer usually pays me in 45 days.

Step 2: I ask for a loan against this invoice.

The lending company says they will lend 90% of the invoice, so I can get AED 90 of my AED 100 tomorrow. I will be charged a 1.5% fee.

Step 3: I decide that, even though my customer always pays me in 45 days, I want a bit of a buffer, so I choose to repay in 60 days.

My fee is AED 2.70 (2 months of 1.5% of the AED 90 I borrowed)

Step 4: I accept and I receive AED 87.30 into my bank account the next day.

Step 5: In 60 days’ time I will repay AED 90 to the lending company.

Why Is this sometimes called invoice discounting?

Because the lending company discounts the value of the invoice by a certain percentage.

What are Some of the Headaches Invoice Financing Can Help Address?

There are no requirements on how you decide to deploy these funds. They can be used for general business expenses, adding a new product or paying your suppliers just as a few examples.

While invoice discounting does not completely remove the worry of getting paid by your customers, it can be a useful secret weapon in your arsenal to help you navigate late payments and still be able to meet the day-to-day financial obligations of your business.

* Reference

From Small to Mighty: How Fintechs can fuel the UAE’s booming SMEs. Access the report here.

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