Optimising liquidity: How to use advance invoicing to drive growth

Reducing pressure on liquidity and having funds to be able to carry out the next project is on every startup’s priority list. Maintaining healthy liquidity is necessary to operate successfully, but, sometimes, accounts receivable can add financial pressure. Advance invoicing helps to mitigate this internal pressure while suppliers receive their payments.

High-growth companies often find themselves constantly searching for financial resources to fuel their progression. On this journey, advance invoicing can be a very useful tool to secure the liquidity needed to operate effectively and take advantage of expansion opportunities.

In essence, advance invoicing is an advance payment from a customer on account of a purchase or the contracting of a service. It is a short-term financial solution to compensate for the temporary mismatch caused by customers paying in instalments, which makes it possible to correct or mitigate situations where there is a lack of liquidity.

Advance invoicing: Why do it?

In general, requesting an advance invoice payment allows you to cover operating costs and immediate expenses, which is especially valuable in situations where payment deadlines are long and can put a strain on your company’s liquidity. In addition, advance invoicing allow you to convert accounts receivable into cash to finance projects, pay suppliers or even invest in business growth.

By reducing the pressure on liquidity, more informed and strategic decisions can be made. It is also a way of securing the exchange: advancing part of the money usually leads to greater success in the transaction with the customer or supplier, who will not want to lose the advance.

As such, this tool can be of great benefit to high-growth companies as they face financial pressures in their quest to scale quickly:

  • Scaling agility. Advance invoicing provides immediate liquidity that allows startups to take advantage of growth opportunities without relying on extended payment terms. This makes it easier for them to be flexible and take advantage of new opportunities in the market.
  • Financing without capital dilution. Advance invoicing is a way of obtaining financing that does not involve dilution of the company’s ownership. Instead of issuing additional shares or seeking investors, startups can use advance invoicing to raise cash without giving up part of their equity stake.

Submitting and advancing invoices step by step

Companies can use funds derived from advanced invoicing strategically: to finance critical projects, expand the business or address urgent financial needs. Planned investment will help accelerate growth with the following steps:

    1. Identify opportunities. It is necessary to identify growth opportunities or critical projects that require additional liquidity and use advance invoicing to finance them in a timely manner.
    2. Issuance of advance invoices. Once agreed with the customer or supplier, the invoice is issued and should show the amount of the advance payment, the due date and any relevant information agreed upon, such as payment terms. It is important to consider that the taxation of advance invoices depends on the tax legislation of the country in which you operate. In the case of Spain, Argentina and Mexico they are taxed the same as with normal invoicing, for example, with Value Added Tax (VAT) or, where applicable, Personal Income Tax (IRPF).
    3. Recording in accounts. Amounts received in advance must subsequently be subtracted from the total amount invoiced, so it is necessary to closely monitor invoices and demonstrate this advance in the budget agreed.
    4. Follow-up and management. All advance invoices issued and payments received must be reviewed. Proper management of these transactions is essential to ensure that deadlines are met and that the advance is used effectively.
    5. Final invoice. The final invoice with the full amount must include both the outstanding amount and the previously advanced invoices by showing, in the form of negative figures, the advances collected up to the date of issue of the final invoice. In other words, everything previously invoiced must be deducted in the final document so that the figures add up at the end of the accounting process.

Advance invoicing and factoring: similarities and differences

Advance invoicing and factoring share some characteristics, as they are two ways to obtain liquidity quickly and help improve cash flow. It is important to understand the differences between them in order to use the option that best suits each company’s situation and needs.

  • Invoice ownership. In the case of advance invoicing, the company retains ownership of invoices and simply requests an advance payment from its customer or supplier. In factoring, invoices are assigned to a financial institution, which assumes their ownership and is responsible for their collection.
  • Risk of non-payment. In factoring, the financial institution assumes the risk of non-payment, which means that the company issuing the invoices does not worry about collection problems. In advance invoicing, the company remains responsible for collection and therefore assumes the risk of non-payment.
  • Costs and commissions. In factoring, the financial institution charges a fee for its services, which include assuming the risk of non-payment and collection management. In advance invoicing, no commissions are applied as the company only requests an advance payment.

Which option to use will depend on business needs and the strategic financial vision applied. Advance invoicing is a valuable option for ensuring liquidity and avoiding capital dilution, as well as increasing customer and supplier commitment. In short, it is a useful item in the startup financial toolbox that can help ensure healthy liquidity and sustainable growth.

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