A Beginner’s Guide to Invoice Finance: 3 Things You Should Know!

A Beginner’s Guide to Invoice Finance: 3 Things You Should Know!
  • Opening Intro -

    Invoice financing provides prompt access of working capital to businesses by releasing the cash tied up in unpaid invoices.

    Often called the 'debtor financing', 'spot factoring' or 'invoice discounting'.

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Often called the ‘debtor financing’, ‘spot factoring’ or ‘invoice discounting’. Invoice financing is a process involving short term borrowing for the purpose of increasing the cash flow position of a company. Invoice financing is often confused with debt factoring, which has an absolutely different financial arrangement.

In other words. the whole concept of invoice finance can be summed up in the following statement. “In order to raise a required amount of cash, you as the owner of a particular business, call upon a financier to sell your credit invoices. The financier in return pays you money immediately, while the customer pays the financier later.”

How Does Invoice Financing Work For Businesses?

There are three steps:

  1. The business draws money against the potential sales. The business draws the money before receiving the final payment from the customer. In simpler terms, the business borrows a percentage value of the total sales ledger from a finance company. Here, the “potential sales” that have not yet been paid for are used as a collateral for borrowing.
  2. The financial company charges for this service on a monthly basis. There’s also a pre-defined rate of interest applied on the amount that’s borrowed against sales’ invoice. They can also refuse to lend against invoices in certain cases.

    Examples include when the customer:
         -sells to overseas companies
         -involves credit risk
         -undertakes sales having long credit terms
         -small value invoices

    During this period, the finance company can demand records of the ongoing credit sales process. They can also demand the sales ledger from the business.

  3. The business raises the invoice. The business can then borrow a percentage of the invoice value as a fee. The percentage is generally 80 percent in most cases.

What Are Some Key Benefits Of Invoice Financing?

  • One of the major problems businesses face is the late payment of all invoices. The process of chasing the outstanding invoices is not only time consuming, but also adversely affects the customer-business relationship.
  • To avoid this, invoice financing supports outsourced credit control. This allows the business owners to concentrate more on product development and customer satisfaction.
  • Invoice financing promotes better management of sales ledger, leading to shortening of payment cycles.
  • Businesses availing invoice financing can pay rents, salaries, taxes and other bills regularly. They will be capable of preparing for the unexpected.
  • The most convenient thing about invoice financing is that it’s quite similar to an overdraft. The businesses only have to pay for the interest on the funds they borrow. This makes the whole process more flexible and user friendly than debt factoring.
  • You can arrange confidential invoice financing. This means that suppliers and customers aren’t notified about the business using sales’ invoices to borrow cash without paying them first.

What Are Some Key Drawbacks Of Invoice Financing?

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Categories: Business Financing