Many view invoice finance as a business finance type of complexity. However, looking further will tell you that behind the complexity seen by many, the concept behind it is simple. With finance invoice, you can turn your sales invoice into a loan security for loan series. Designed for businesses that are making money through invoicing some other businesses for works that are completed, it has the capability of reducing the pressures in the working capital through providing funding on the same day for those outstanding invoices.
What is Invoice Finance?
Invoice finance helps in releasing those cash that are tied in the customer invoices that outstands. It is ideal for those companies that are planning for expansion or those who want to see improvement in their cash flow. Aside from the cash flow improvement, invoice financing also helps in reinvesting in operations, paying the suppliers and employees and the growth earlier than they could if they wait for the customer’s payment. A business will pay the some of the invoice amount percentage to the lender. This will serve as fee for allowing them to borrow money. Invoice financing is a solution businesses take on when they encounter problems where the customers are taking a long time to pay them, which affect the operation of the business. Yes, It’s not easy like undestaning a Business Loan.
Invoice finance does not only benefit the businesses. Even the lenders get their fair share of benefits to reap at. Lending money with invoice financing is different from line of credits that can extend and have no security. Here, the outstanding invoices will serve as the collateral. They can also limit their risks, as they do not need to advance the full invoice amount to the business lending with them. Invoice finance does not guarantee that the risks are eliminated. There is a high possibility that the customers will not pay their outstanding invoices. When this happens, it would result to a collection process that is both expensive and difficult. It is up to the business how they can collect their money back and pay the lender.
There are 2 main types of invoice finance: factoring and invoice discounting. Factoring provide control both on funding and the credit. It enables you to access the value from the outstanding customer invoice even before they are paid. In this type, the company will be selling the outstanding customer invoice to some lender that will pay them from 70% up to 85% mount worth of the invoice. When the lender receives the full payment for that invoice, they will then remit the remaining percentage and the business will be paying for the interest and the service fee.
On the other hand, invoice discounting provides control with the funding only. Here, you are provided with the finance that you need. However, the control on collecting payments on the outstanding invoices remains on the credit team. This is almost similar with the invoice factoring. The only difference is that the company will still do the payment collection instead of the lender. This way, customers are not aware of the arrangement between the lender and the company. The invoice amount that the lender will be advancing to the business is also higher at 95%. After the clients pay the invoices, the business will then repay the lender and that alone. In this type, they will not need to pay for any service fee. This is very simillar to Debtor Finance
Benefits of Invoice Financing
Invoice financing like all other business finance strategy come with benefits that make business people consider it worthy of their time and effort.
- Cost-Effective – Every business has its own specific requirement. You can get best valued deals if you can find good lenders to do business with.
- Security – Protect the company against insolvency with the customers.
- Speed – this helps you access funds even before the invoices are paid. This way, you can continue with your operation without delay.
- Confidentiality – the use of invoice finance facility is only between the company and the lender. They will disclose the agreement only when the company agrees to it.
- Control – the control for your finances is in your hands.
- Choice – your sales ledger management and credit control can be handled by an expert team or by yourself. It would be your choice.
How Invoice Finance Works
Sometimes, invoice financing is considered as an expensive and complicated way to increase finance. But, service providers are always on a mission to prove how cost effective and simple it can be. As have mentioned, invoice finance has two main forms – invoice discounting and invoice factoring. Invoice discounting is unidentified, meaning it is a confidential service in which your clients won’t determine of your involvement, whereas invoice factoring is a released arrangement.
There are four important steps to invoice factoring:
Submit an invoice to a factor
Some things will occur if you submit an invoice to a factor. They will initially know if you meet admissible criteria to get financing. Also, they will conduct owed diligence on the client you are invoicing to determine if they’re really good credit risks. You and the factor will eventually sign a financing agreement if the factor you have chosen decides to accept your business based on the research they have conducted. An initial maximum amount of money will then be settled for you to borrow.
The factor lends you an advance
Also known as advance rate, an initial advance will be given by the factor. Generally, it is anywhere from 70 to 98% of the factored invoice’s value. The amount of advance you will receive depends on your industry, your transaction’s size and any other risk factors. At present, the factor can also give out a notice of assignment to the customers you have selected to factor. The notice of assignment asserts that your business has allotted the factor as the entity to get further payments for all invoices. The factor will pass along the payment once they receive the invoice payment that you have not factored.
Your customer compensates the factor
Your customer will compensate the factor within thirty, sixty or ninety days, as stated by the terms of the invoice.
The factor gives you the outstanding balance minus payments
The factor will now give you the outstanding invoice balance after getting your client’s payment. This is called reserve amount, minus their payments.
How invoice discounting works
Invoice discounting allows businesses to obtain dollars as soon as the invoice is presented, quickly getting money for much needed working capital to support the growth and need of a company. The benefits of invoice discounting don’t only end here. But, how effective does it work?
- You supply products and services to your clients.
- You send the invoice to your clients, but allocated to a nominee bank account and a copy to yourself.
- The factor will give you up to 85 percent of the invoice amount in 24 hours. At this moment, a service charge is abstracted from your account as a ratio of your turnover.
- The client fully settles the invoice. This is done by making their imbursement direct to the factor. Once the outstanding balance is paid, a small finance payment is abstracted from your account, charged as a fraction of the amount loaned.
- When the invoice is already cleared, the factor is now ready to give you the outstanding balance.
Before becoming eligible for invoice discounting, invoice discounters will expect you to show that you are really an established lucrative business with assessed accounts and a noble credit control management procedures in position. With so many business bankers that offer reliable service, you might find it confusing which one to work with. You should conduct a thorough, comprehensive research to give you real peace of mind.
Is Invoice Finance Right for Your Business?
Every kind of business or company requires the right amount of funding to advance or set a new level of transactions. In this case, it would be better to consider having financial services so that the sourcing of income and funds would not be a difficult one to have. There comes Invoice Finance on the line and like invoice factoring, it makes your business gain many benefits.
How is this possible? Let us find out if it is right for your business:
- It makes Companies Expand Well
The direct settlement of the invoice is essential in collecting the payments and funds for the company. In this way, you can be sure that the fund sourcing of the company would fall directly into your hands. This would provide you better options to weigh your savings and add more income to your business. Thus, it has the right way to expand.
- Effective Business Start-ups
A business or company requires a great start-up so that to ensure if it will meet the client standards or the company preferences. In this way, you can be sure your business would not qualify for overdraft or loan finance. The result would be fewer debts for the company and a reason to make effective options in managing the business. This could lead to the fast expansion of the company.
- Launching of a new product
Every business requires an excellent finance service to ensure if the product would be effectively launched. This would require a huge need for capital. With the adequate funding and payments given by Invoice Finance, there is a sure way for you to have the large capital that you need to expand the business. In this way, no difficulties would be assured to you.
- High well Managed Businesses
A business with the right source of funds would not have any problem when it comes to managing the business. With a huge income comes the better handling of the resources. It would assure you of the best options to take. If you will manage your business well, you will reach the point in seeing your business prosper in an excellent manner.
- International Business Trading
The financing of invoice and payments could lead to a big deal. If you’re using invoice finance, it would help succeed on the many efforts you would be doing. The emergence of business due to the huge capital would assure of the best ways to making the business prosper. You are given the right connections and the right procedures. The result would be a great international business expansion.
Invoice Finance is good in many aspects. Aside from the fact that it would the sourcing of the funds easier, it also gives you the right measures to in the business. With this, there is a guarantee of efficient use and management of the business. Invoice finance would directly provide you with the clients you need. Thus, a fast successful business would take place in the future.
What is Invoice Finance?
Even though there are a lot of ways how to deal with cash flow of a small business, it’s still essential to becoming an expert in this stuff if you plan to stay in the market, all of the advice for maintaining cash flow becomes more redundant once you find yourself in the struggle for revenue.
Single invoice finance is a ground-breaking solution, which you can call upon right away whenever you need it – offering you the chance to increase your cash flow on an invoice-by-invoice basis. This is a kind of factoring, which enables corporations to finance a single invoice, rather than having to finance the entire accounts receivable ledger. This is utilized by corporations, which need to provide net 30 to net 60 terms to clients, however, cannot avail to wait for payment.
The solution has been gaining a lot of popularity, as it is a flexible way to finance small business, which requires working capital. Further, single voice finance is also considered in the industry as “spot factoring and single invoice factoring.”
It can enhance your cash flow at the same time free the much-needed working capital through giving you around 90% of the worth of a single invoice – along with the remainder paid, minus the small charge, as soon as payment is delivered from the customer. Thus, corporations have access to such refunds in days, instead of months – providing their business the finance, which it needs to run efficiently and grow continuously over time.
Can I use Single Invoice Finance?
In case you didn’t know yet, single invoice finance can be utilized for the majority of businesses, which need to raise money. It encourages business owners as it can be utilized ‘as and when’ devoid of any hassle of working time stressing paperwork, which might come along with a contract.
How can you know if you have invoices, which are due in thirty to sixty days?
One of the challenges of dealing with big commercial clients is that they sometimes demand payment term as a condition of working along with your company. You need to spend money to offer the product or service and wait for 1 to 2 months for the payment. This delay could generate a problem if you do not have enough money reserves to deal business expenses while you are waiting for the payment. On the other hand, such cash flows concerns normally worsen when the payment you’re waiting for occurs to happen to a big one.
How to Avoid This from Happening
An easy way to solve such cash flow issues is to finance your invoices. This solution offers you with enough funds you need to pay for those important expenses like suppliers and wages. Apart from that, you can also make use of these funds strategically to promote new opportunities. This kind of financing doesn’t need you to finance the entire accounts receivable ledger. It enables you to sponsor a single invoice. Plus, it is flexible, therefore you can utilize it as often as you need it.
Important Things You Need To Know
The entire factoring transaction is structured as the sale of the asset to the factoring company, with the use of 2 payments. Transactions normally flow as follows:
- The factoring company will check the commercial credit of the customer
- Raise the invoice with the customer
- Financing terms are approved
- The invoice is confirmed with your customer
- Then, the factoring company will send the first payment for 80 percent of the invoice.
Difference between Invoice Finance and Invoice Factoring
Most of the small or large businesses in the world have funds that are used to handle the business for other purposes. If you have a business, the case of using financial services such as Invoice Finance and Invoice Factoring are essential. These could give you an edge in running your business. Companies can collect funds through this process. However, you must first know its differences to determine which one would suit your preference.
In Invoice Factoring, the provider has the role of managing the sales ledger, control of the credit and checking the client’s invoices. In this way, the client would have the assurance that his or her ledger is checked in an effective way.
On the other hand, in Invoice Finance, the business you have has a full control of its own sales ledger and the mode of payment. In this way, the business has full control of collecting the funds of the business. The ledger is monitored or checked in real time without the help of accounting staff.
Another difference between Invoice Factoring and Invoice Finance is in the sense of confidentiality it has. In the factoring, the funds and the other transactions are made in the natural process. Both the client and the company know the funds that are transferred. In the invoice financing, the transaction is treated confidential and the client will have no idea of the fund sourcing of the company.
In Invoice Factoring, the client directly settles the invoice they have in the financing company. In doing so, the client has full knowledge of the transactions and the sourcing of funds. He or she would do the invoice payments; make the required information and so on. The invoice payments are given directly to the clients and the transaction is between the financing company and the client.
In this procedure, each of the clients is more likely to know Factoring arrangement. This would give them the edge in taking the right kind of measures to make the fund collection and effective and easy task. This makes sure that all things regarding the company funding are handled in an accurate way as possible. Many businesses or corporations would have an easy and successful payment of their funds and the factoring procedures help them in achieving this.
Another difference between the two financial services is that with Invoice Financing, your customers, for example, would still pay you directly. This could be done on an installment basis or any appointed time. The direct payment would ensure you have an idea of the process of the payments and the fund sourcing. Aside from this, there is no need for the clients to know that a third party would be involved in the transaction of the invoice payments. This would add to the confidentiality of the matter.
What Would You Choose?
Both Invoice Finance and Invoice Factoring are important in your business. However, it will still depend on you if which of these financial services you’re going to choose. If it is your first time in the business, the best thing is to weigh things firs to see the right financial service that is reliable.
If you have a small business and a limited resource, invoice factoring would be the best in your part. However, if the numbers of your resources were unlimited, it would be wise to try Invoice Finance. In either way, the success of the business would depend on your willingness, expertise, and dedication. It is up to you if how would you apply finance or invoice in your business. The sure thing is a success would be the result.