Invoice financing is a very common as well as 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.
Three types of receivable financing are there: invoice factoring, invoice financing and receivable based lines of credit
- Invoice Factoring 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 50-80% 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 3-5% of the invoice value.
- Invoice Financing is just like factoring except that it’s 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. If your customers become delinquent, you will be responsible for the amount you advanced. The fees are usually 2-4% of your invoice value per month.
- Receivable Based Line of Credit is a credit line based on a percentage (usually of 80-85%) of 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. But this is usually a cheaper option than invoice factoring or invoice financing with APR less than 20%.
Invoice Financing-How it works?
- You provide the goods/services to your customer and invoice them
- You send the invoice details to the invoice finance provider
- Availability of funds of a certain percentage of the face value of the invoice. Usually within 48 hours (see different factoring companies for invoice advance % details)
- Either your own credit controller or the invoice finance provider’s sales ledger service carries out the invoice collection procedure
- 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 Now
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 Finbucket 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.
- Boost in Collections Efforts
Essentially, opting for this 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 and decrease the amount of time that must be spent attempting to settle customers’ credit accounts.
- 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 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. 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.
It is advised to use a good accounting software to record income and expenses so that invoice financing companies can process the application quickly.