In the business world, in addition to generating revenue, it’s essential to have those funds available whenever they’re needed.
To secure this much-needed liquidity, accelerating invoice payment is an option worth considering, as it allows you to make the funds from that invoiced work or service available immediately.
Here’s an example:
Imagine that today you’ve invoiced 200,000 euros, which will be paid in three months, but this very week you have committed payments totaling 50,000 euros and you don’t have that money, since you’ve used up all your cash flow to secure that 200,000 euros in invoicing.
Right now, you’re facing a temporary cash flow imbalance because you need money you don’t have.
What can you do?
Receiving payment for invoices in advance often becomes a necessity.
Do you know what options you have?
There’s no doubt about it:
The sooner you collect on your invoices, the better it is for your business’s economic and financial health.
However, it’s not always possible to get customers to agree to the payment terms you want.
The question to consider is whether it’s beneficial for you to accelerate an invoice and collect payment early, even if there’s a financial cost involved.
Advancing invoices is recommended in the following cases:
If you’ve decided that you need to get an invoice paid early, the next question is how to do it.
There are several options available, each with its own distinct features, which we’ll summarize below.
This option involves issuing an invoice for a partial payment in advance of providing the service or selling the goods that are the subject of the business relationship between the parties.
Advance invoices differ very little from standard invoices, except that they include the word “advance” in the description.
However, it’s important to note that even if the final invoice is issued in a different quarter, the taxes on this advance invoice must be paid in the current quarter.
The main problem with this option is that you need to convince your client to agree to pay you certain amounts in advance, often requiring you to offer a discount for early payment.
Invoice factoring is a flexible and practical financing alternative for obtaining liquidity.
It involves assigning the right to collect payment on an invoice to a third party in exchange for receiving the money today, without waiting for the due date.
There are two types of invoice factoring, each with different costs:
In the event of non-payment, both the debtor and the assignor are jointly and severally liable for the invoice.
The creditor assumes the risk of non-payment should it occur, and the debt is recoverable only from the debtor. Therefore, the cost of this type of advance is higher than in the previous case.
A somewhat similar, though different, arrangement is confirming.
It is a financial service focused on managing a company’s payments to its suppliers.
In other words, in this case, it is the payer who contracts this service.
The chosen financial institution is responsible for making the agreed-upon payments, which are typically defined as a lump sum.
When the time comes, the bank informs each recipient of the payment date.
However, it gives the recipient the option to receive payment early if they pay interest based on the time of the advance.
Also, as in the previous case, this can be done with or without recourse, depending on who assumes the risk of nonpayment.
The problem with this alternative is that factoring lines are approved only for companies of a certain size, with a proven track record, and sufficient creditworthiness.
Therefore, many of our customers may not offer us this form of payment.
We can also ask our client to pay the invoice by issuing a promissory note.
This way, we do not disrupt the client’s payment schedule, since the promissory note will be due upon maturity, and we can discount it, allowing us to collect the funds before its maturity date.
For more information, feel free to ask us about discounting promissory notes with no obligation.
As you can see, it’s possible to receive advance payment on an invoice, although this usually involves a pre-agreed fee.
That said, there are financial solutions to protect you against liquidity problems that may affect your business.
Discover all the benefits you can enjoy with Workcapital’s business financing