When a finance provider extends a short-term loan to a
borrower, based on unpaid invoices, the process refers to invoice financing. In
this type of financing, a company meets its short-term liquidity needs based on
the generated invoices, which the customer hasn’t paid for. With invoice
financing companies are benefited in improving cash flow, paying employees and
suppliers and reinvesting in operations much before if they had to wait for the
customers to pay the complete balance. However, the company receives the
specific amount, but after a few days, since the unpaid invoices acts as an
accounts receivable.
It also supports in solving certain problems like customers
taking longer to pay or difficulties in getting other business credits.
Companies mostly opt to go for invoice financing to pay for their business
activities at times when they are going through a liquidity crunch.
Companies can gain up to three times more cash by invoice
financing than the traditional ways of funding and with the business turnover
the borrowing power also gets improved. Though by advancing the entire invoice
amount, companies limits it risk, still the risk never completely gets
eliminated as the customer might actually not pay the invoice – and such cases
involve difficult and expensive collection process and will involve both the
bank and the business.
Invoice financing is
commonly structured through:
●
Invoice factoring
Invoice financing mostly works in the
following manner:
●
Companies give product
to the customer and make an invoice
●
The invoice details
are sent to the finance provider
●
Companies pay up to 90
per cent of the invoice’s face value – usually within 48 hours
●
Products are shipped
and the customers make payment after receiving the products
●
After the payments are
received, the remaining value of the invoice will be paid – less a service fee
Invoice financing includes the
following key features:
●
High value financing:
All the creditors get paid and the company is still able to manage the cash flow.
●
Fast and transparent:
The process being entirely paperless helps in speedy receiving of finance
●
No collateral required:
No valuable assets are taken as security by the finance provider.
●
Flexible repayments:
Companies can avail convenient repayment tenors on business invoices till the
debtor makes the complete payment.
Advantages of invoice finance:
●
More flexible than
business loans or other finance methods
●
Decisions to lend
becomes faster against invoices
●
Funding rises along
with the total turnover of the company
●
Greater level of
borrowing against unpaid invoices
●
Reduces late payment
risks
Disadvantages of invoice finance
●
Invoice finance solves
only a specific problem and is unnecessary if a customers pay invoices on time
and within the payment terms.
●
If the debtor fails to
pay the invoices, finance providers will directly deal with it and the
relationship between the company and the customer might get affected.
●
The invoice financing
is not available if products are sold to the general public
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