Invoice Financing - A Quick Solution to All Your Business Credit Needs

When a buyer pays for a product or service to a business, he or she receives a commercial document stating the details of the transaction. These kind of documents containing the product/service details, quantities, and the amount paid are known as invoices. If a business owner is facing a temporary financial crisis, these invoices can be used to receive monetary aid to take care of the credit needs related to the business. Under this scheme, the merchant will receive the funds in advance against unpaid invoices that the customers are yet to pay for.

If you are a business owner in need of financial aid in order to improve the cash flow within your business, make payments to the employees or suppliers, spend on the business operations, or further invest in the growth of business, you can avail the benefit of Invoice Financing. This scheme is directed to help merchants gain access to funds for temporary financial crises even before their customers make their payments. This type of financing schemes help solving credit requirements when the customers are taking a long time to make their payments. In order to avail the Invoice Financing scheme, business owners will have to pay a percentage share of their upcoming invoice amount to repay the debt.

What is Invoice Financing?

When a business purchases goods from a retailer or wholesaler, the payments of the items are usually done later. However, purchasing materials from retailers in credit means that the business has to give away a huge portion of the funds received from its customers to pay off the debt. This system of payment reduces the cash flow within a business since the money has been used to clear off the debt instead of being used to enhance the operations. To help business owners better the financial condition of their businesses, financial lenders offer Invoice Financing which can be used to take care of the monetary needs of the business while maintaining a sufficient amount of cash flow. This loan can be used for short-term credit requirements of a business based on the unpaid invoices that the company will receive. The funds received under this asset-based lending scheme are subject to the account receivables from future customers of the business. Due to this reason, Invoice Financing is also known as Account Receivables Financing.

What Are the Benefits of Invoice Financing?

If you are deciding whether to opt for Invoice Financing for the financial requirements of your business or not, you should see the below mentioned list comprising the key features of the scheme:

  • Quick access to funds Applying for a loan or other financial product is a time-consuming task and the loan disbursal may take longer. If an applicant wants to receive cash immediately for his or her business expenses, Invoice Financing is the option that they should go for.
  • Locked cash can be released This scheme is targeted towards liquefying cash that has been locked for a long time due to delayed payments by the customer. This amount can, then, be used in case of emergencies or to help the business grow further.
  • Improves cash flow As Invoice Financing can turn pending account receivables into liquid cash, the cash flow within the company increases. This can, in turn, lead to shorter working capital cycles.
  • No collateral is needed The business owner does not need to provide any collateral to be eligible for this financing plan. The applicant only has to provide the invoice transaction details that are yet to be paid.
  • More chances of growth Since Invoice Financing allows for credit sales to be converted into quick cash, there is more room for the business to grow in terms of sales and operations. The funds from this scheme can be used for multiple company expenses such as paying the employees or suppliers, buying any machinery, or making a further investment.
  • Complete confidentiality Once a business owner decides to opt for the Invoice Financing scheme, the customers and suppliers will not be made aware of the borrowings of the business subject to the sales invoices. Although, this happens only when a business owner opts for Invoice Discounting.
  • Maintain a healthy relationship with the customers Using this scheme, a business can offer credit period to more of its customers while maintaining its regular cash flow. In turn, this will help the business flourish both in terms of sales and operations.
  • Better upfront cash with less chances of outgrowth When compared to other loan and overdraft facilities, a business can avail more liquid cash using Invoice Financing. Since the cash received from this scheme is directly dependent on the sales of the company, there is also less chances for the business to outgrow the amount.

Key Points to Remember About Invoice Financing

Before you decide to liquidate your assets in order to avail this financial scheme, you must learn about the following points mentioned in the list below:

  • Many stakeholders might perceive Invoice Financing negatively due to the false stigma people have towards it. Therefore, a business should always consider this factor before deciding to avail this scheme.
  • Most of the financial service companies offer Invoice Financing only on commercial invoices. In case the business caters to the general public, it might not be eligible for this scheme depending on the lender.
  • If this scheme is used excessively then the business might lose focus from improving the liquidity and working capital cycles. This might lead to lenient credit norms for debtors and the business might incur losses in the long run.

Types of Invoice Financing

Invoice Financing can be broadly categorised into two types - Invoice Factoring and Invoice Discounting. Learn about Invoice Factoring and Invoice Discounting in details below:

  • Invoice Factoring In order to meet the immediate cash requirements of a business, a merchant might decide to sell all the accounts receivables to a third party, known as factor, at a discounted price. This type of debtor finance is known as Invoice Factoring. In this financing scheme, the borrower avails a loan by providing the invoices of his or her business as collateral in order to receive liquid cash. If the invoices are paid in full by the borrower, the lender will remit a percentage of the invoice amount to the business and the borrower will only have to repay a fee or interest for the service. In this type of Invoice Financing, the lender collects the payments from the customers of the business. Due to this reason, this type of financial scheme might reflect poorly on the business. Therefore, businesses can use Invoice Discounting as an alternate to receive financial aid through Accounts Receivables Financing.
  • Invoice Discounting In this type of Invoice Financing, the business can use its accounts receivables or invoices to receive liquid cash for its credit needs. However, in Invoice Discounting, the customers make the payments directly to the business and not the lender. Therefore, the customers are not aware if a business is using Invoice Financing for its financial needs. Using this type of debtor finance, the lender offers a loan amount subject to a maximum of 95% of the invoice amount to the borrower. The business can repay the financing company using the payments received from the customers without any additional fee or interest.

    This type of Invoice Financing is more popular due to being seamless and transparent. Additionally, it also doesn’t hamper the reputation of the business.

Conclusion

If you are a business owner facing a short-term financial crisis, you can use your accounts receivables or invoices to receive a loan to meet your business credit needs. Invoice Financing is an upfront cash loan that can be used by a business to improve the cash flow and offer better services to its customers while releasing the locked-in funds. A borrower does not need to provide any collateral in order to avail this scheme and receive financial aid quickly within as less as 24 hours. With Invoice Factoring and Invoice Discounting, a business owner can choose how he or she wants to repay the financial services organisation offering the loan.

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