Business finance

Invoice financing: how it can benefit your business

Accountant-and-planning
Invoice financing helps improve working capital

Invoice financing refers to a process used to borrow money against the funds due from clients. This method helps companies boost cash flow and pay suppliers and employees on time.

It also permits reinvestment in various operations, promoting growth faster than if businesses had to operate only after all balances were repaid in full. Invoice financing is particularly beneficial for companies that need help securing other types of credit solutions or work in an industry where customers have a long time to pay.

Understand the basics

When it comes to learning how invoice financing works, things are relatively straightforward. The method is most commonly employed by retailers or wholesalers who provide goods in large quantities or services that extend over a prolonged time.

This means the client will typically purchase on credit, meaning they don’t have to pay upfront. While this method allows businesses to be more flexible in relation to their clients, it could also pose problems for companies as it ties up funds that could otherwise be used to invest in business developments.

Enter invoice financing, which helps improve working capital and can then be used to provide immediate funds to meet company fees and expenses. Invoice financing can be organised in different ways, generally via discounting or factoring.

The former refers to a system in which the business collects payments from customers. In this case, the lender can advance the company with up to 95% of the invoice.

The latter is relatively similar, except that the business sells invoices to a lender, who can pay roughly 85% of the invoice amount upfront. Since the lender collects the payments, customers are aware of the arrangement.

How does it work?

When you issue an invoice with payment terms, the customer holds the funds for a given number of days. This time can range between fourteen and ninety days, with thirty being the median duration. That means the client has a fixed number of days to pay everything in full. Invoice financing allows you to pay cash advances in full based on the debtor’s book.

You have the option to choose the eligible invoices you would like to fund, as well as how long you want to support them. Once approved, they will be paid in full into your nominated bank account.

The service provider creates a special “trust account” into which the total amount of the outstanding invoice is to be deposited. Afterward, the remaining invoice balance, sans additional fees, is directly transferred to your bank account.

The main advantages

Invoice financing facilitates immediate cash flow, meaning that the need for extensive paperwork is reduced, as is the requirement for waiting times. There’s no need to commit to long-term debt, which can be disadvantageous for businesses in the long run.

However, perhaps the most valuable aspect is that it contributes to business growth, one of the pinnacles of any company and something all business owners are aiming towards.

Unlike extending lines of credit, invoices collateral for financing. This way, the transaction is more secure and allows for recourse if the borrowed amount isn’t repaid on time. Since not the full invoice amount is extended, the risks associated with the transaction are limited.

Choosing an invoice finance service allows you to save time via automated tools, access more significant funding that can release up to 90% of the invoice’s value and obtain complete digital onboarding. Done correctly, it can be one of the most important aspects of cash flow management for businesses.



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