Business Loan: Invoice financing Guide

  • Invoice Financing term is most commonly used nowadays. It is a process by which Businessman can borrow money on amounts due from customers.
  • This process is profitable to business as it helps to improve the cash flow position of the company as well as it helps them to pay employees and suppliers.
  • A type of short-term borrowing is extended by a lender or a bank to its customers on the basis of goods and services sold.
  • It is done by the company to carry and solve the liquidity needs of the customers.
  • It is a type of asset finance where the underlying asset is accounts receivable. Now let us understand the term ‘Accounts Receivable’.
  • It means the money owed to a company by its debtors. It is a right of the company to claim because it sold goods and services on credit to a customer.

Acts as Collateral

Invoice financing is very beneficial to lenders also. This type of financing doesn’t eliminate all risk, though the lender put a limit on its risk by not providing the total of the invoice amount to the borrowers.

Process

  • Common ways of Invoice financing are
    • Factoring, and
    • Discounting.
  • Factoring is a way in which the company sells its outstanding invoices to a lender who might not pay the 100% of the worth of invoices.
  • This type of process is more suitable for small and medium enterprises (SME) as they are new and have only recently started trading.
  • It is risky for large corporates because the qualifying criteria for factoring are having a good credit worthiness i.e a strong and honest credit rating.

Working

  1. The first step for invoice factoring is that the respective company will send its invoices to prospective customers and then forward these invoices to an invoice factoring company.
  2. The role of an invoice factoring company is that they will verify the creditworthiness of the end customer i.e. the customer.
  3. If the company found that the end customer is creditworthy, then they will cover 80-90% of the worth of the invoice.

At last, the customer pays the full amount and the factor releases the remaining finance amount of the invoice.

Discounting, on the other hand, is a method by which the company gets as much as 90% of the worth of invoices. In this, the payment is collected by business from its customers and then payment is made back to its lenders. When in future the client makes the payment to the company, the company then pays it back to the lender or the bank deducting the appropriate fee or interest.

 BENEFITS

  1. Invoice financing is beneficial to both the company as well as to the customer.
  2. The cash flow position of the company improves to 80 to 90% of the invoice amount is received in advance.
  3. Large enterprises creditworthiness increases when they receive a good credit rating by the agencies.
  4. Goodwill of the company increases. However, there are various benefits of a business loan.
  5. It does not put any charge on the balance sheet as the liabilities doesn’t exceed and balance sheet remains clean.
  6. It is a very flexible way of finance as it does not requires long contracts and finance.
  7. Factoring fees are also reasonable.
  8. It helps to maintain the confidentiality of the respective company and customers.

This reduces time, saves money and efforts, reduces in-house expenses and gives you a professional experience. It helps to reduce paperwork and processing and helps the company to gain more profit and goodwill.

Invoice financing

  • B2B Businesses which implies business to business.
  • Seasonal Businesses which means that business which works on seasonal nature.
  • Businesses with large invoices and high profits.
  • Those businesses which have big well-respected clients in B2B Business.
  • Those businesses which have long billing cycles like clothing, manufacturing, retailing etc.
  • Media and advertising businesses.
  • Recruitment businesses.
  • Constructing and logistics businesses.
  • Professional and recruitment companies.
  • Retailer of warehouse distribution.
  • Various wholesalers.
  • Publishing companies.
  • Companies that don’t qualify for bank loans or finance.
  • Distribution companies.
  • That business that needs cash.
  • That business that has uncertain invoices.

How to enquire invoice financing?

Before enquiring about invoice financing one must complete below-mentioned criteria

  • Every business must have a turnover of about 50000 euro a year.
  • It must require the finance for business use only.
  • It should be selling its products or services to other businesses on credit.
  • Every business must intend to have invoices in arrears.

IDBI bank procedure

IDBI Bank provides both purchase and sale bill discounting and invoice financing for vendors as well as large corporates. Under this bank takes the bill drawn by the borrower on his respective customer and after deducting pay him immediately.

IDBI classifies its bills into four categories and those are

  1. LCBD ( LC backed with bill discounting)
  2. CBD (Clean Bill Discounting)
  3. DBD (Drawee bill discounting)
  4. IBD (Invoice bill discounting)

Features of invoice financing

  • It is useful for both the vendors as well as large corporations.
  • There is no requirement of the bill of exchange or any acceptance.
  • First In First Out method
  • Various overdraft and bill discounting facilities are available.

Invoice financing is a very common as well as a popular financing option for businesses that get paid long after they deliver their goods or services. It helps with managing cash flow, especially when you need working capital or have timely opportunities to reinvest in your business.

Receivable financing

Three types of receivable financing are

  • Invoice factoring
  • Invoice financing, and
  • Receivable based lines of credit

Invoice Factoring

  • Invoice financing is a common financing option for industries like
    • Clothing, or
    • Manufacturing, where long accounts receivable are part of the normal business cycle
  • In Factoring an individual provides cash advance based on the total value of the invoices.
    • You typically receive 50 to 80% of the invoice value upfront based on the risk profile of your clients.
    • The remaining value will be received, once the client pays off the invoices, minus a factoring fee.
  • This fee can be structured in any number of ways, but it generally nets out to be about 3 to 5% of the invoice value.

Invoice Financing

  • It is just like factoring except that it is not a sale of your accounts receivable.
  • You use the account receivables as collateral to get the advance and you are ultimately responsible for managing the customer relationships and payments.
  • However, if your customers become delinquent, you will be responsible for the amount you advanced.
  • The fees are usually 2 to 4% of your invoice value per month.

Receivable Based Line of Credit

  • It is a credit line based on 80 to 85% of the value of your outstanding invoices.
  • Calculation of value is based on the aging of the invoices.
  • Namely, they give a full value for current invoices and a discount for overdue invoices.
  • You will pay a pre-negotiated interest rate based on your balance.
  • When an invoice gets paid, your balance will be reduced. One has to pay a certain amount of fee when he/she draw the credit line.
  • This is usually a cheaper option than invoice factoring or invoice financing with APR less than 20%.

How does Invoice Financing work? 

  1. You provide the goods and services to your customer and invoice them.
  2. You send the invoice details to the invoice finance provider.
  3. Availability of funds of a certain percentage of the face value of the invoice.
  4. Within 48 hours see different factoring companies for invoice advance % details.
  5. Either your own credit controller or the invoice finance provider’s sales ledger service carries out the invoice collection procedure.
  6. When your debtor pays, the balance of the invoice is made available to you – less a service fee

Benefits of Invoice Financing

  • Small and mid-sized companies can get really affected by financing.
  • They cannot afford to choose the wrong type of financing options which could badly hurt a company long run.
  • Invoice financing stands apart from all other types of financing as opting for invoice financing offers many benefits. Let’s have a look at them:

Enjoy Cash Flow

  • Opting for a traditional loan means that a business will need to gather up all paperwork related to the finances of the company, meet with a bank representative and fill out applications in order to secure financing.
  • The approval process can take weeks, and businesses may have to wait for the funds to be available if they are approved.
  • With invoice financing through the financial institution online exchange, businesses can start receiving offers for their receivables shortly after they are finished with their application and the invoice uploading process.
  • Once a business accepts an offer for their receivables, the funds can be transferred and available within about two business days.

The boost in Collections Efforts

  • Financing method gives a business the benefits of hiring a professional collection agency without having to actually pay a collection agency.
  • Since the factoring company has an interest in whether money is recovered in relation to accounts receivable. The company will act as a collector and contact customers to request prompt payment.
  • A lot of money can be saved by businesses using invoice financing because they reduce their need to employ a dedicated collection professional.

Avoiding Business Debt

  • When a business is obtaining cash for money that is owed to the company, so it is considered to be a form of debt-free financing under Invoice financing.
  • Instead of increasing the overall debt of the company when securing financing for a special project or expansion of the business, a business can tap into assets that it already has in order to get the cash that it needs.
  • The fact that a business is using the asset contained within its receivables account when opting for invoice financing is the reason that it is easier to obtain this type of financing.
  • Factoring companies are getting something in return for their cash.

No Limits on Use of Cash

  • When a bank provides a business with a traditional loan, the bank wants to know what the cash is needed for before it approves the business loan application.
  • Any money received from the bank must be used for this purpose in order to comply with the loan agreement.
  • When it comes to how the business decides to spend funds, Invoice financing does not limit a business.
  • However, through Invoice financing, a business is free to use the funds.
  • To take advantage of this opportunity in case a lucrative opportunity comes up.

Invoice Discounting is very useful method followed to make complete use of company’s due accounts. If done well, this can help business owners to manage their cash flow efficiently.

By | 2018-05-02T06:01:03+00:00 November 3rd, 2017|Business Loan|0 Comments

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