With increasing inflation numbers and steadily rising interest rates, it looks as though we may be on the brink of another major recession. This reality has many business owners looking to take proactive steps to not just protect their business from the fate of so many others, but to ensure it’s set up for continued growth and success in the years ahead. 

Recently Royal Bank of Canada (RBC) declared that the Canadian economy is on track for a “mild recession” in 2023, due in part to GDP growth of less than 1%. Variables such as real estate, jobless claims, and the delayed economic ramifications of pandemic restrictions have all contributed to economic slowdown and uncertainty.

And there are additional conditions to consider: consistently rising interest rates, record inflation, and increasing business costs – including materials, labour, and debt financing. Potential bond downgrades and a tightening credit market are also at play. These factors have combined to create strain and pressure on business owners, who were already facing the pressures of balancing operating expenses with longer payment times from big customers. However, business owners are known for finding solutions, and that’s exactly what they’re doing now to strengthen their finances. 

For many businesses facing cash flow challenges, alternative finance options are just one way of dealing with cash flow issues. Another is invoice funding. Taking advantage of this innovative funding solution can ensure you have the capital necessary to meet payroll, pay expenses, and still take on new projects to grow your business.

The Current Challenges: Inflation, Interest Rates, and Tightened Credit

Given the current economic situation, there are a number of cash challenges that business owners are encountering. Traditional funding sources such as banks and other lenders are not extending as much credit as they may have previously. They’re also setting higher interest rates on products such as loans, lines of credits, and business credit cards. All of this adds up to a higher cost of borrowing for businesses. 

Businesses that were started just before or during the Covid-19 pandemic are also dealing with the reality that they may not have the required business history or creditworthiness of a lot of other businesses, which makes it difficult for them to secure funding. This is on top of the challenges the pandemic (and its many government-mandated shutdowns) placed on businesses. 

The Current Opportunity: Cash is an Advantage for Maintaining or Growing Your Business

With a possible recession and volatile economic conditions, getting into a strong cash position is one of the most strategic things for businesses to do with their finances right now. Why? 

• Increased competitiveness. By ensuring they have cash on hand, businesses can take advantage of last-minute end-of-year projects and be a stronger competitor when bidding on projects by having cash available to take on work quickly - and by reassuring customers that they will be able to complete their projects with the utmost in quality and timeliness. It's especially important they position themselves this way given the reality of the current economic climate. Competitors are all likely to be experiencing the same pressures, and with some strategic moves now, you can ensure your business comes out on top. 
• Maximizing work volume. Having access to cash on hand also better equips businesses for taking advantage of the most work possible before the end of year.
• Improved financials. Cash on hand makes balance sheets for 2022 look their best. This is an important consideration for attracting investors or even for securing traditional funding (even though it is harder than ever given the economic climate). 
• Maintain business–or even grow. Businesses will be in a more competitive position to get more work or maintain current levels of work when they have cash available for covering payroll, increasing staff, and purchasing equipment or materials. This means that in spite of the economic conditions, you can still grow your business without taking on debt, and with quick access to funding within days. 

Invoice Funding Ensures Cash and Bypasses Funding Challenges

With traditional lenders tightening their requirements and their lengthy application process, many business owners are looking for alternative funding options to keep their business running smoothly. One such option is invoice funding. By using invoice funding, businesses can avoid current issues with other kinds of traditional funding sources, such as tightened credit requirements and increased interest rates.

What Is Invoice Funding? 

Invoice funding is a form of financing where a business sells its outstanding invoices to an invoice funding company for quick access to capital. The business owner receives cash for the value of the unpaid invoice (usually minus any fees) ahead of the payment terms. The business owner’s customer then works with the invoice funding company to settle the invoice according to the original payment terms. This allows businesses to access cash for work they’ve already completed, without having to wait on lengthy payment terms that are often 30, 60, or even 90 days. 

Invoice funding also sometimes goes by the terms invoice factoring, accounts receivable factoring, or receivable financing. Invoice funding is not, however, the same as invoice financing. With invoice financing, a financing company advances a business the value of their invoice, and the business owner repays the advance over a certain number of weeks to the financing company, plus a fee.

How Does Invoice Funding Work? 

Every invoice funding company will have its own process for funding invoices, but in general, here’s what you can expect when you factor an invoice. 

1. Create an account and submit outstanding invoices for funding. The first step in funding an invoice is to sign up for an account with an invoice funding company. You’ll need to provide information about your business, banking details (for deposits), and tax status. After that, simply select an eligible invoice to fund. 
2. Funding company does due diligence. The funding company then verifies your business and banking details, as well as makes sure taxes are up to date, and there’s no liens outstanding. During this step, the funding company will also verify that the invoice is real. 
3. The business’ customer is asked to sign an NOA. The funding company will ask the business’ customer to sign an NOA, or notice of assignment. This just means that they understand that the funding company now owns the funded invoice and they should redirect payment accordingly.  
4. Funding is released. Once all details are verified and an NOA is in place, funding is deposited directly into the business bank account, less a fee. Once the business owner’s customer pays the funding company (according to the original invoice terms) the process is complete. This process allows businesses to get a funding boost whenever they need it, while still extending net payment terms to their customers. It’s a win-win. 

Benefits of Invoice Funding

There are a number of benefits of invoice funding, especially within the context of rising inflation and a tightening credit market. Here are a few: 

Invest in growth 

Another useful aspect of invoice funding is that it gives business owners the capital necessary to take advantage of growth opportunities. With invoice funding, you can have the funding you need to make hires and staff up your business, as well as pay any upfront costs associated with taking on more customers or a big contract. Invoice funding can also give you access to capital for marketing, which can help you increase your brand awareness and land new customers. 

Debt-free funding 

Since invoice funding is not a loan, business owners don’t have to worry about paying the money back. Instead, their customers are the ones responsible for paying the funding company. In addition, because it’s not a credit product, there are no costly interest payments to worry about — just one simple, upfront fee. As a source of debt-free funding, invoice funding is a great option for businesses looking for a quick boost of capital, especially in a tightening credit market. 

Unlimited access to capital 

Because invoice funding is a type of revenue-based financing, the more you invoice the more funding you can access. You’re simply getting paid for work you’ve already completed ahead of net payment terms. The more your business grows, the more your business can grow. Banks may be reducing limits or hesitant to extend more credit given current market conditions, but invoice funding doesn’t have the same limits or risk.

Fast turnaround 

Upon approval, invoices can be funded in a matter of days. This is much faster than traditional financing options like loans or lines of credit, which can have months-long application and approval processes. 

Non-dilutive capital 

Invoice funding doesn’t require you to give up equity or ownership in your company, which means that you can retain full control over your business while still accessing the funding you need to cover everyday expenses and take on growth opportunities, even when the economy is slowing. 

Free up time 

When you fund your invoices, you no longer need to worry about having to chase down accounts receivable. This gives you more time to put back into the activities that matter the most for your business. It also cuts down on the administrative work of staying on top of your outstanding invoices. Your customer simply pays the funding company according to the original invoice terms. 

Increased peace of mind 

Cash flow problems are one of the biggest issues that business owners lose sleep over. Having a quick, reliable source of funding in your back pocket at the ready can help decrease some of this stress. You’ll have peace of mind knowing that you can fund invoices at any time in order to meet your financial obligations with ease, even if we end up in a recession.

Steel River Group had high praise for FundThrough’s invoice funding services when a major growth opportunity hit. “There is definitely peace of mind when we think about FundThrough,” said Steel River’s Finance Lead Kevan Mikkelsen. 

Easier to qualify 

Invoice funding relies on the creditworthiness of your customers, which makes it easier to qualify for than traditional funding options. Your personal and business credit score aren’t as important, nor are your number of years in business. The application process is also faster and easier than applying for a line of credit, bank loan, or getting a limit raise. With online funding companies, you can easily set up an account in minutes, and upload any supporting business documentation from the comfort of your home or office. 

MapleX CEO Dave Thomson appreciated the ease of qualification when he wanted to expand his business. “Even though we had proof of purchase orders from a major brand, we lacked an established legacy of credit. We couldn’t get that loan, even though we had guaranteed payment. Plus, you still have to go through a 30-page agreement just to get a loan.” He added that, “In a growth stage, factoring has become something that we rely on despite some of the costs. Knowing that the factoring is available, I can fund it at 60 days, or I can fund it after 30 knowing that I have that option.”

Covering expenses 

One of the biggest benefits of having access to cash when you need it is the ability to cover your everyday expenses. This includes things like making payroll and purchasing supplies or equipment. Inflation is increasing the cost of supplies for businesses of all kinds; invoice funding can ensure you have cash available to cover any additional expenses. 

Disadvantages of Invoice Funding

No financing method is 100% perfect, and invoice funding is no exception. There are a few perceived disadvantages of funding invoices, including: 

• Customer contact is required. Because an invoice funding company needs to verify invoices, customer contact is required. However, a reputable funding company will work to maintain your relationships with customers and will be nothing but professional in any interaction. 
• Negative perception of business. Many business owners think that if they choose to factor invoices that their customers will think they are in financial trouble or can’t reliably service their needs. This couldn’t be further from the truth! Growing businesses of all sizes use invoice funding to take on bigger projects so they can grow. Doing so gives them the cash on hand to pay the upfront costs involved, where they might otherwise have had to turn down opportunities – what a waste!
• Customers might not understand. You might worry that your customer won’t understand how to work with a factoring company, but it’s actually more common than you think. Many companies are used to working with businesses that fund invoices, and even have entire processes set up for handling these types of payments. Invoice funding simply gets you access to payment for work you’ve already completed, ahead of schedule. 
• Can be complicated to account for in bookkeeping. Some business owners find it challenging to account for factored receivables in their bookkeeping, especially if they don’t have a financial background. Luckily, our trusted partner FundThrough has a step-by-step guide for how to record funding transactions in your QuickBooks account. 
• Hidden fees. Not all funding companies are transparent about their fees. Some charge hidden fees such as a set-up fee, monthly service fee, or minimum volume fee, while others don’t. Make sure to ask about hidden fees when you evaluate an invoice funding company and ensure that you only pay when you fund an invoice. 

Having cash on hand to take on more business than if you’d waited for a customer to pay according to 30, 60, or 90 day invoice payment terms means that you have peace of mind that you can cover expenses and grow your business to ultimately make more money–even in a difficult economic climate.

CANARU Enterprises owner and founder Bob Jameh says it best. “FundThrough is a necessity especially when working with large, powerful clients. Big box companies build their financial strength by offering lengthy payment terms to suit their own cash flow needs. Customers like myself end up waiting 30-90 days (or more) to get paid, but that schedule puts my business in a bind. FundThrough helps me move on to other projects with absolute confidence.”

As inflation and interest rates increase, and the credit market tightens, businesses with a strong cash position will be poised for success.

About FundThrough

FundThrough is a leading fintech company accelerating cash flow and enabling growth for small and medium businesses. Based in Toronto, FundThrough’s AI-powered invoice funding platform gives B2B businesses fast, customized funding offers to get their invoices paid in a few days - rather than a few months - and get quick access to cash that’s already theirs. For more information, go to http://www.fundthrough.com. To learn about FundThrough’s partnership with Intuit QuickBooks and how you can fund an invoice, click here. If you’re ready to create a free, QuickBooks integrated account, get started here.