For businesses looking to leverage money from future payments for goods and services, invoice financing is one of the best ways to finance future invoice accounts receivables.
Invoice financing allows businesses to improve cash flow, pay employees and suppliers, and reinvest in operations and growth sooner than if they had to wait for their customers to pay them.
Invoice financing is a broad term for when a third party agrees to buy your unpaid invoices in exchange for a fee. Invoice financiers (lenders) can be a specialized independent business, a division of a bank or other financial institution, or one or more individuals. Companies can use invoice financing to finance slow-paying accounts receivable.
What is the Process of Invoice Financing?
Accounts receivable financing companies advance you cash collateralized by your company’s outstanding invoices, providing you with an excellent way to immediately put more money into your business. Businesses pay the lender a percentage of the invoice amount as a fee for borrowing money.
With invoice financing, your company could receive a quick advance of about 85% of the value of your invoices, with the majority of the remaining 15% paid to you later. It’s ideal for covering late-paying customers or cash flow slowdowns.
Invoice Financing Methods
1. Invoice Factoring
Invoice factoring is a type of invoice financing in which businesses sell their accounts receivable in order to improve their working capital. This financing provides the company with immediate funds that can be used to cover business expenses.
Because you are selling an asset rather than receiving a loan, factoring is easier to obtain than traditional financing. The most important qualification requirement is to have invoices from creditworthy commercial clients. As a result, factoring is now available to small businesses without significant assets or long credit history.
2. Trade in Invoices
Unlike factoring, invoice trading involves businesses “selling” invoices to financiers. The key distinction here is that invoice trading employs online platforms as a tool to enable businesses to avoid traditional financiers and instead obtain financing from individual investors (or groups of investors). The concept applies the peer-to-peer lending principle to invoice financing.
3. Discounting of Invoices
The invoice financier will not manage the company’s sales ledger or collect debts on its behalf if you take this route. Instead, the financier lends the company money in exchange for unpaid invoices, usually at a percentage of their total value.
For this service, the company must pay a pre-agreed-upon fee. If the company uses invoice discounting, it is still responsible for collecting debts, but it can be done confidentially so that customers are unaware.
In many ways, this type of financing is similar to a bank overdraft in that the company has access to short-term cash when it needs it and pays a facility fee in exchange.
Conclusion
Invoice financing can help to solve problems associated with slow-paying customers and difficulties obtaining other types of business credit.
Invoice financing is also advantageous to lenders because, unlike extending a line of credit, which is unsecured and provides little recourse if the business fails to repay what it borrows, invoices serve as collateral for invoice financing.
