What Invoice Financing Involves
What Is It About?
Invoice financing is a type of loan given out for a period not generally exceeding 90 days. It is invoice-oriented and is a way to improve cash flow in business. It releases cash held up in the unpaid accounts receivable.
Invoice financing is a contract with an independent third party. They will pay you upfront for some percentage of the value of a particular invoice. They take a fee for each invoice they deal with. The parties finalise the payments when the invoice is paid.
Invoice financing is often known as invoice discounting, invoice factoring or receivables financing.
How It Works
Invoice financing works by offering cash in advance against invoices due to be paid soon. This period is usually between 48 hours and 90 days.
The business would normally wait for the payment of the invoice. This is not good for business cash flow. Invoice financing offers a boost to cash flow.
Here's a step-by-step guide for a standard invoice financing procedure:
- The business applies for the financing. It provides adequate proof of receivables due
- On agreement a substantial percentage of the full amount of the invoices is loaned to the business
- When customer pays the invoice the financier receives the full amount from the borrower. The borrower may keep some amount, but always the financier gets their fee.
- This cycle can repeat itself, and the business has to apply freshly against more receivables owed to release new cash
Pros of Invoice Financing
Invoice financing allows the majority of the invoice cash to be available very soon. Hence, the business can have improved cash flow. In the traditional model the delay to payment may be many days or even months.
What to Consider
Credit control is an important aspect of invoice financing. Some invoice financing providers may want to contact the customer directly. This needs careful management to keep customer relations smooth.
There are many variants of this type of financing and checking the details is important. The business needs to be sure it meets their needs.
Invoice financing offers a business cash flow advantages. However always be aware that it is a form of borrowing and the product needs to match the business.