What is Invoice Financing?
Invoice financing refers to the procedure through which businesses can assist advances against pending invoices from the customers. In return, businesses pay a specific percentage of this total invoice amount as a fee to the lender.
Although this process of financing businesses can meet their short-term liquidity needs by taking advantage of the percentage of the value of the outstanding invoices as a loan. These outstanding invoices are taken as accounts receivables. It means that businesses will receive the specific amount against invoices raised, but at a later date.
Utilizing this way to avail funds, businesses can improve the cash inflow, invest in operations to encourage growth, pay the suppliers and employees, and see to a host of other financial requirements.
Invoice financing helps companies eliminate the requirement to wait for customers to settle bills and get access to necessary funding immediately, thus making them a popular method of financing adopted by businesses.
How Does Invoice Financing Work?
Before deciding on invoice finance, it is important to learn how the entire funding procedure works.
Most businesses generally sell the goods and services to the customers (like retailers and wholesalers) based on credits. It is understood that customers generally do not pay upfront for such goods and services, and are instead charged at a later date.
As the business sells its goods or services to customers, it generates an invoice payable within 30-90 days. Invoice financing is the procedure by which businesses can avail instant funding against such invoices, by following these steps –
- Once an invoice is generated, businesses move forward to the chosen financier.
- The financier then reviews the invoice and pays out a percentage of its value as a loan to the business within 24-72hrs.
- The business can then wait for the customer to resolve the pending invoice amount. If unpaid, the business owners can follow such payments, or get the financier to do it on their behalf, depending on the agreement.
- Once this invoice is settled by the customer, businesses obtain the remaining percentage of the invoice’s value.
- Invoice financing lets businesses mobilize the capital which would otherwise have been held up in unpaid invoices.
Benefits of invoice financing for your business
Invoice financing not only involves a company getting a loan on their accounts receivable but also includes a reduction in form of processing fees and interest. Unlike large corporations where multiple funds exist for meeting expenditure, small businesses need cash ready for day-to-day operations.
Slow-moving accounts receivables are one of the biggest barriers in the growth trajectory. The inflow of cash slows down, while the outflow of cash continues at its normal rate. This shortage ultimately eats into the working capital funds of an SME and bottlenecks operations.
An extended shortage of working capital funds can lead to competitive a disadvantage or worst, a shutdown.
invoice financing gives flow and stability to a business, by delivering funds early for slow-moving accounts receivables.
As the loan amount is approved at a value similar to or less than the invoice amount, a business is also safeguarded from vicious credit loops. So, if the SME is constantly at pains to get invoices cashed, it can be considered opting for an invoice financing partner.