Whether you’re working to cover expenses or debt repayment, managing cash flow effectively can be an ongoing challenge for small businesses. When straightforward tactics are falling short, you may need to look for alternative tools, such as invoice financing.

Lack of cash flow can become a serious issue – a U.S. Bank report says 82 percent of business failures are due to poor cash flow management.

No wonder so many entrepreneurs worry about getting it right. The State of Small Business Cash Flow, an Intuit QuickBooks study, says 69 percent of those surveyed point to cash flow concerns as reasons that keep them up at night.

“First, you can try the simplest, most effective ways to manage your cash flow,” writes Sarita Harbour in a Fundera blog. “For example, send invoices early, offer discounts for customers who pay early, and use online accounting and payment systems to make it easier for clients to pay. “

Part of the Issue

Sometimes cash flow issues stem from late payments coming in, or outstanding accounts receivables.

It’s reportedly a common problem. One-third of all small business owners in the U.S. estimate their companies have more $20,000 in outstanding receivables, says the Intuit QuickBooks study.

And the international MarketInvoice Report by ExIm, the Export Import Bank of the U.S. , says more than 60 percent of invoices are paid late, and 20 percent are over two weeks overdue.

“Having a positive cash flow is critical for businesses to keep their engines running,” according to the report, which looked at more than 300,000 individual invoices issued to companies in 80 countries.

Invoice Financing

One financial tactic for businesses that need help with cash flow is a type of asset-based lending called invoice financing, which is also sometimes called invoice discounting.

With invoice financing, your business borrows money against your outstanding accounts receivables. A lender gives you a portion of your unpaid invoice – usually 80 percent to 90 percent – up front in the form of a loan or line of credit.

“Once your client pays the invoice, you’ll pay the lender back the amount loaned plus fees and interest,” writes Harbour in the Fundera blog. “In this scenario, your business is still responsible for collecting outstanding money owed by your clients.”

In some cases, the invoice financing provider will sync up with your accounts receivable systems behind the scenes. When your customer pays the invoice, they might automatically deduct their fees before forwarding you the balance.

“Invoice financing suits businesses that need money quickly and feel confident they can collect on the outstanding invoices owed to them by their customers,” the Fundera blog says.

The costs of invoice financing vary and depend on when the customer pays you back. Typically, you’ll be charged a certain percentage each month that the invoice remains outstanding.

Similar to ‘Factoring’

Invoice financing is similar to invoice factoring – both are used to deal with slow cash flow stemming from numerous late-paying customers or unpaid invoices.

Like invoice financing, invoice factoring provides a flexible funding strategy, writes Geri Stengel, president of Venturener, in a blog posted on Forbes. “It’s not a loan because you don’t incur debt. It’s not equity because you don’t give up a piece of your company.”

Both tools can also be good options for small businesses that can’t get other types of business financing.

“Since these lenders look more at your invoices and less at your business’s financial health and your credit, you might find this type of financing easier to secure than others,” Harbour explains in the post on Fundera, an online marketplace for small business loans.

What differentiates invoice financing from invoice factoring is the structure of the financing and how the payment is collected from the customer.

“Once the factoring company takes over responsibility for collecting the receivables and you have your cash in hand, they’re taking over the risk that your clients won’t pay,” says the Fundera blog.