Invoice finance

Invoice finance

Invoice finance is a term that is used to describe a wide range of asset-based finance facilities within which the businesses sell their accounts receivable or invoices to some finance provider or a third party for receiving a percentage amount of their value. It is considered as a useful financing tool to facilitate businesses growth which gets hampered due to slow payment of invoices.

Invoice finance can be seen as a way of borrowing money and is totally based on what your clients owe to your business. Unpaid invoices usually represent money which has to be paid to you, but as a seller you have to wait for some time for payment terms to be fulfilled, which can be from 14 days to 90 days or even more. Invoice finance provides you with most of the cash immediately, such that you will not have to wait to get paid.

The concept of invoice is quite simple. It says is spite of waiting for a number of days and weeks in order to get paid for your invoices by customers, finance providers provide you with an advance amount of your invoices on immediate basis. This means you will be get paid faster for the work you have completed in such a way that you can focus on other tasks for running your business.

How Does Invoice Finance Work?

1.   Seller continues his business in a usual manner and invoice the clients and customers.

2.   Further the invoice details are passed towards the agreed provider by the seller.

3.   The finance provider pays the seller with an agreed percentage (this may vary company to company), often within the first 48 hours.

4.   As per the agreement, seller will be responsible for chasing the payment as usual if that is necessary, or the financier will do that on behalf of the seller.

5.   Seller receives the remainder amount of the invoice amount once the invoice is paid by the buyer, deducting the agreed service fees.

How invoice finance benefits you

●        Invoice financing is considered to be more flexible than business loans or other finance methods.

●        Decisions to lend against invoices are made faster as compared to some other criteria.

●        The funding grows in-line along with the company’s turnover.

●        You can get a greater level of borrowing against such assets.

●        Help to reduce the risks of late payments.

What are the Costs?

Since invoice finance can be new for you as an exporter and importer thus you should be careful while understanding involved costs, fees as well as charges which are levied by the providers and specifically to avoid hidden fees.

General invoice financing charges includes the following:

Service Charge

Service charges usually covers management costs, collections costs along with the administration costs, and it is charged as a percentage of your company’s gross turnover. The rate for this service usually lies between 0.75 and 2.5%.

Discount Charge

As you pay interest amount on a business loan, just like that the discount charge or we can say fee has to be paid which is levied on the money which you draw down. This average charge falls between 1% and 3% over base rate, and discount charge is calculated on a daily basis following the advance of the money. Which results in more charges if your customer takes longer to pay.

Discount charges has to be paid either on a weekly or monthly basis, depending on the preferences of the borrower.

Invoice discounting

Invoice discounting

Invoice discounting helps companies and business organisations to expand and grow.

Invoice discounting provides business a way to borrowing money against the amounts due from clients. It usually helps businesses to improve their cash flow, pay workers and suppliers, and even in reinvesting in operations as well as early growth. Borrower is supposed to pay a specific percentage of the invoice amount to the finance provider as a fee for borrowing the money. Invoice discounting is always seen as a problem solver when it comes to clients who takes a long time to pay back to the supplier.

Invoice discounting is one of the simplest forms of invoice financing. With the help of invoice discounting you can sell unpaid invoices to a lender and in return they will provide you with a cash advance which is usually a percentage of the invoice’s value. When your client has to pay for the invoice, the lender is supposed to pay you the remaining balance after the deduction of their fee.

Another way of understanding invoice discounting is that it can be seen as a series of short-term business finance which is availed using invoices as a security. In other words, the lender is known to the fact that you owe the money, so they lend you most of the amount of it before the customer actually pays you.

KEY TAKEAWAYS

●        Invoice discounting makes it possible for a business to use its unpaid invoices in the form of collateral for financing.

●        Business can use invoice discounting for improving cash flow for their operational needs as well as in speeding up expansion and investment plans.

●        Invoice discounting could be structured as per the needs so that the buyer is unaware that their invoice is financed or is managed by the lender and there is involvement of a third party.

Invoice Discounting Process

To better understand how the process works, let’s look at it step by step:

1.   A business raises an invoice to a debtor on a purchase made by the latter.

2.   The company sends the same invoice to a finance provider or bank.

3.   The bank then makes the advance cash payment to the borrower in as early as 24 hours. It only lends a certain percentage of the invoice amount.

4.   Once the amount from the debtor has been paid up in full, the finance provider releases the remaining amount from the invoice to the company. 

Invoice discounting example

 Darth has just started his Business and has contacted for discounting facility with The Invoice Company for helping with the cash flow, and Darth issues an invoice to his client worth $10,000 for the work he has already completed. Darth’s agreement which he had made with The Invoice Company states that the advance percentage is 75% which means Darth will be advanced $7,500 in advance by The Invoice Company as soon as an invoice will be raised.

Usually, Darth is supposed to upload the invoice on his online account with the finance provider and then further receives the advance.

Darth’s client settles up the invoice after a few weeks by paying $10,000 within a trust account which is controlled by the finance provider. Because of the confidential facilities, from the buyer’s point of view, it will look as if they are directly paying to Darth.

The Invoice Company will then have to pay Darth with the remaining $2,500, deducting their fees. The fees are usually around $250-300, so Darth will be receiving amount of between $2,250 and $2,200 as per this example.

pre export finance facility agreements

Pre export Finance

Pre-export financing usually takes place when a finance provider advances certain amount of funds to the borrower totally based on proven orders from buyers. As a trader you need to raise funding for producing and supplying the commodities.
In a number of cases the supplier has to make necessary arrangements for the importer for sending payment directly to the finance provider or lender. The lender further sends this amount to the seller after deducting charges along with interest associated with the loan which is termed as prepayment finance.

One of the crucial reasons for adopting pre export financing is that the borrower will get access to sufficient liquidity for maximising the company’s production.
Before providing finance to the exporter, finance provider will have to consider a number of factors such as production and risk of delivery of products. The repayment of the borrowed fund is contingent on the efficient production as well as sale of goods. Payment risk is one of the major issues within which the seller distributes the consignment as per the decided tenor but the importer fails to pay in full on time.
Eligibility: Pre shipment finance is available to all types of exporters
such as:

● Merchant exporters;
● Manufacturer exporters;
● Export and Trading houses:
● Manufacturers who supply goods to export houses trading houses  or merchant exporters.
How is pre-export finance used?
A pre-export finance is quite different from other finance products and services; such as corporate loans provided against the balance sheet of the borrower.
In a pre-export finance funds are usually provided directly from the finance provider to the producers; for effectively assisting with the working capital requirements of the business organizations. Using this pre-export finance supplier can purchase raw materials along with bearing processing costs, storage costs as well as transportation. Typically, a pre-export finance comes with a repayment tenor of 1 to 5 years.
pre-export finance facility agreements
Usually the pre-export finance agreement contains certain provisions which specifically focuses on the overall ability of the seller or borrower of producing a product and of generating income by trading that commodity.
The key provisions usually relate to:

● drawdown and the term
● production of commodity
● the offtake contracts of trade
● regular reporting about the production and sales of good
● insurance
● debt service which cover ratios as well as top-up clauses; and
● the collection accounts



Documentary Evidence: below are the following documents that are
required to be submitted by the direct exporter if they wish to avail pre-
shipment finance:

1.    There should be a confirmed export order/contract and/or
2.    Availability of a non-replacing letter of credit which will work in favour of the exporter; or
3.    Original cable/fax/telex message that gets exchanged between the exporter and between the buyers.


Pre export finance is considered as an established structure which is used for providing finance to producers of commodities. In pre export finance, finance provider provides funds to exporter for the producers for assisting them to cope up with their working capital requirements.

The Crucial Importance of Trade Finance

What Is TradeFinance?

 

Trade finance depicts financial instruments, services and products which are used by companies for facilitating international trade. Trade finance can make it possible as well as easier for buyers and sellers to transact their business through trade. 

The crucial importance of trade finance is it exists to mitigate or we can say to reduce the risks involved within the trade transactions. These risks can be payment risks or corporate risks. 

There exist two players in a trade transaction: (1) the supplier, who requires payment for the goods being sold, and (2) the buyer/importer who wants to make sure that he pays for the correct quality and quantity of goods.

 

Understanding Trade Finance

The key function of trade finance is introducing third-party towards the trade transactions in order to remove the risk of payment along with supply risk. It provides supplier with receivables and payment as per the agreement whereas the buyer may get extended credit for fulfilling the trade order. 

Basically, following parties are involved in trade finance:

●        Banks

●        Trade finance companies

●        Importers and exporters

●        Insurers

●        Export credit agencies and service providers

Trade finance is commonly used when traders require some kind of financing to carry out various trade related tasks and to facilitate the trade cycle funding gap. In order to provide effective trade finance, the financier or trade finance provider requires:

-          Controlling the usage of funds, controlling the products along with the source of repayment

-          Monitor the trade cycle via trade transaction

-          Security over the commodities and receivables

TYPES OF TRADE FINANCE PRODUCTS

The market of trade finance consists of certain short-term (with a maturity of normally less than a year) medium term as well as long-term trade finance products. These can be distinguished on the basis of their tenors. Short term trade finance has tenor of less than a year whereas long term can have tenor of 5 to 20 years.

Commonly used trade finance products are:

●      Letter of credit

●      Supply chain finance

●      Structured trade and commodity finance

●      Export and agency finance

●      Trade credit and political risk insurance

To bring down the payment risk and the supply risks during international trade, trade finance introduces third party to business transactions. Through trade finance, exporters get receivables or payments, as per the agreement and the importers receive credits to fulfil the trade order.

The key parties involved in trade finance are the banks, companies, exporters, importers, insurers, credit agencies and service providers.

While general financing usually indicates financial necessity in cases where buyers lack funds or liquidity, trade finance is mostly used to provide protection against the unique inherent international trade risks – like currency fluctuation, political instability, non-payment issues, credit-worthiness of any party involved in the trade and others.

WHAT ARE THE RISKS?

As global trade takes place across borders and usually the buyers and supplier are not familiar with each other and as a result there exists various risks to deal with. These risks include:

Payment risk: Will the seller get paid on full or partial basis on time? Will the buyer get the commodities he expected?

Country risk: This kind of risk can be seen in a number of situations such as exchange rate risk, political risk and sovereign risk.

Corporate risk: The risks which are associated with the company or importer and exporter. For instance, what credit rating is provided by them? Do they have any history of non-payment?

In order to reduce such risks, banks along with other finance providers have stepped in to facilitate traders with trade finance products.