Invoice financing Guide

INVOICE FINANCING: A term 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, this 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 owned 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

Invoice financing can be put in multiple ways, but the most common ways 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 riskier 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 credit worthiness 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 80-90% 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.
  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. Invoice financing is used by many companies to make profits and to grow. When it is properly planned by the companies, this a way of saving money.
  9. 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.

Best for invoice financing

  • B2B Businesses which implies business to business.
  • Seasonal Businesses which means that business which work 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 logistic 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 have 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.
  • Every business must require the finance for business use only.
  • Every business 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. Then the bill is presented to the borrower’s customer and the total amount is collected. 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.
  • FIFO method can be used for calculating the interest.
  • Various overdraft and bill discounting facilities are available.
By | 2018-01-09T12:16:21+00:00 November 3rd, 2017|Business Loan|0 Comments

About the Author:

Pulkit Jain is the founder of LegalRaasta – India's top portal for registration, trademark, return filing and loans. Pulkit is a veteran CA with over 10+ of experience.

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