Invoicing for Small Businesses
Posted on 27th August 2021 at 16:02
We’ll look into the basics of invoices and then how you can use invoice financing as a tool to get a quick injection of cash.
1. What is an invoice and why do I need them?
An invoice is a formal request for payment from a customer that has received goods or services from you. It is an itemised document that clearly states what they brought and how much they will need to pay. Invoices are part of bookkeeping and need to be clear, accurate and organised.
2. What should I include in an invoice?
Google sheets have invoice templates, so do cloud based accounting systems such as Quickbooks or Xero. You want all your invoices to have the same format and look professional. Ensure you include the following:
Your businesses contact and billing address.
You clients billing address.
Invoice number. These need to be sequential and are essential to keep things organised as they refer to that invoice alone.
Date you issued the invoice. This should be as soon after the goods or services are provided as possible.
Due date of the payment.
In a table you should have a further breakdown of what the services/goods purchased with individual prices. This can be the flat or hourly rate charged. Also have a column for quantity purchased.
Tax should be stated separately. Please see VAT section below for more details.
Payment terms. This is the amount of time you have previously agreed with the client they have to pay the invoice. It’s usually stated as ‘Net – number’. For example, if you’re client has 30 days to pay the invoice the payment terms will be ‘Net 30’.
Personal note. Add a thank you and any other information that you think would be useful for the client.
3. How should I keep track of my invoices?
The invoice number will help you do this. Set them up sequentially and have your own spreadsheet which is updated every time you send out an invoice. Carry out a weekly review of who is due you pay you and send a friendly reminder if they aren’t a regular client. You can also save a copy of the invoice in folders, think how you would like to organise these in line with your type of business. Is it more useful to organise them by invoice number, month sent or possibly, by client? Most businesses send their invoices by email, save as a PDF that can’t be edited and attach to the message as timely as possible.
4. What’s the difference between an invoice and a receipt?
Although very similar a receipt is issued after payment, an invoice is a request for payment. Be aware that an invoice isn’t legally binding within itself. To make a transaction legally binding you need to have a contract signed between the two parties or, at least, have an agreement in writing of some sort, for example an email exchange. To cover yourself it is good to outline what your payment terms are, what services/goods you will provide and what the costs will be to ensure you and your client are on the same page.
5. What is a VAT invoice and when do I use it?
If you and your client are NOT VAT registered you shouldn’t issue a VAT invoice. You should simply charge for the goods/services provided including the information from point 1. If you and your customer are VAT registered you are required by HRMC to provide a VAT invoice for goods/services subject to sales tax. This also applies if the invoice between the two VAT registered parties includes non-sales tax items. VAT invoices look very similar to regular invoices but include a little more information:
Your VAT number
The VAT rate(s) charged
The total amount before VAT
The total amount of tax due
The total amount due including VAT.
Now we’ve gone through the basics of invoices, we’ll explain the basics of what invoice financing is and how it can benefit you.
6. What is invoice finance?
You can use your outstanding invoices to raise cash for your business quickly. You can sell the invoice to a company or borrow against the invoice, both minus a fee. Some companies will require your company to be a certain size and want all your outstanding invoices sold/borrowed against together, others will be happy to work with smaller businesses and allow you to select which invoices you raise cash with.
7. What are the types of invoice financing?
Factoring – this is when you transfer your invoice debt to a company. They take a percentage or charge a fee and give you the cash. You have transferred the invoice to them so they are now reasonable for collecting that debt. This is traditional invoice financing and usually involved you handing over a chunk of or all your outstanding invoices.
Selective – this is where you choose which invoices you want to ‘sell’. You may only need a smaller cash injection so this may make more sense as the company will only take the fee from that selected invoice(s) rather than all your outstanding invoices.
Discounting – this is a loan based on your outstanding invoice(s). You borrow money against the value of your invoices and then pay the invoice financing company back after your client has paid.
8. When should I use invoice financing for my small business?
Invoice financing can be a quick way to get a good amount of urgently needed cash into your business. When deciding on if you think it may work for you consider
Contracts – make sure you’re not tied into long contracts, large contract termination fees, handing over more invoices than you want to.
Shop around for the best percentage – traditionally the majority of invoice financing firms wanted to work with large, well established companies however the industry has change drastically in the past few years with much more flexible plans and options available to you.
Use this as a short-term solution – when you’re a small new business your suppliers may negotiate longer payment terms with you, build relationships with them to get them to pay invoices quicker and use invoice financing in the meantime.
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