An invoice is a document that specifies the details of a transaction. When a customer purchases a product or service, the invoice is furnished to validate the particulars of the order. Typically, the invoice includes the details of the product/service, the amount paid, and the quantity. Invoices are essential for conducting business transactions across different market sectors. Invoices serve as proof of purchase or sale. When a business is undergoing a financial crisis, the same invoice can receive monetary aid and attain credit for the business. This scheme is known as invoice financing. Invoice financing enables the merchant to receive funds in advance, even against unpaid invoices.
Businesses often purchase items or services from wholesalers. The business owner may use credit to avail of the purchase and later use the portion of funds received from consumers to pay off the debt. However, this system reduces the cash flow within the business. The funds used to clear debt could enhance the growth of the business. To help business owners have better control over their finances, a leading number of lenders offer invoice financing. This scheme allows the business to maintain its cash flow while using the available funds to promote the business. It is an asset-based lending scheme determined based on the future account receivables from the customers. Invoice financing is also widely known as accounts receivable financing.
There are two types of invoice financing.
Invoice Factoring: Invoice factoring is a type of debt finance in which a borrower sells unpaid invoices to the financier to avail of a loan. However, the financier only makes a percentage payment of the total invoice value, and the lender regains the payments through the business's customers.
Invoice Discounting: Invoice discounting is a type of financing in which the borrower receives capital by presenting the accounts receivables or invoices. However, unlike invoice factoring, customers are unaware that the business generates funds.
Invoice financing carries innumerable benefits for businesses.
Enables Release of Locked Cash: The scheme enables the quick liquidation of cash that has been inaccessible owing to delayed payments on the part of customers. The payment can be used to fulfill other essential costs or to fund the growth of the business.
Immediate Fund Access: There are times when a business requires immediate funds to serve a given requirement. Applying for traditional financial products like business loans or other credit can be extremely time-consuming due to in-depth paperwork. Invoice financing is a good way to attain funding within a short time.
Facilitates Cash Flow: Liquidity is an important component for the smooth functioning of any business. Invoice financing increases the flow of liquidity within the company. It reduces the terms of working capital cycles.
Non-Collateral Requirement: Businesses do not have to provide collateral when availing of this scheme. However, a detailed summary of the invoices must be furnished during the application process.
Increases Growth Opportunities: Invoice financing enables the credit sales to be converted into liquid cash. This generates a better opportunity for the cash to be directed towards other opportunities pertaining to sales and operations. Advanced machinery can be purchased; further investments can be made, and much more.
Confidential Financing: When a business owner opts for invoice financing, the customers or suppliers do not know the borrowing as this method offers confidentiality.
Promotes Customer Relationships: Invoice financing allows businesses to provide their customers with enough time in the form of a credit period. This promotes goodwill among consumers and ensures that the business has flourishing sales.
Better Opportunity for Upfront Cash: Compared to other loan facilities, a business loan enables better upfront cash. This is because the funding opportunity is directly dependent upon the company’s sales.
Here are some key aspects of the invoice financing scheme that you should understand before you apply for it:
There is a stigma attached to invoice financing, and potential shareholders may perceive the scheme negatively. This is a major factor to evaluate, especially for businesses that wish to expand their base over a short span.
Invoice financing offerings are highly subjective and different lenders may have varying requirements. Typically, lenders are highly apprehensive of offering the scheme against commercial invoices. This means that if a business's clientele includes the public, then it may not be eligible for the scheme.
The availability of funds through invoice financing may lead to employees becoming a complacent and losing focus on capital liquidation. The business might ultimately incur losses in the long run.
The invoice financing scheme is a great opportunity for business owners to wade through short-term financial crises. It is a cash loan that can help with daily operations and improve the offered services. The most notable aspect is that a borrower does not have to provide collateral, making it a quick financial aid. At Finserv MARKETS, you can also apply for a business loan to fund your entrepreneurial pursuits. Apply today!