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.