Invoice Financing Explained

In today’s system of trading, every company would have liabilities in the form of creditors and assets in the form of debtors. As a business owner, your debts are recorded in your accounts as ‘accounts receivables’. The sum total of the value of your accounts receivables is the amount that is owed to you by your debtors. You would bill each debtor the amount due to you. And as long as these invoices remain unpaid, the amount therein is recorded under accounts receivables in your books. But although this figure represents your business assets, you cannot use them to finance anything. That’s where Invoice Financing comes in.

Invoice financing is also known as invoice factoring. With invoice financing, you can turn your company’s accounts receivables into cash by transferring them to a factoring company. A factoring company is a company that specializes in providing working capital by taking over the unpaid invoices (debts) of any company in exchange for cash. The factoring company usually advances a certain percentage of the total value of the invoices to your company. Industry practice varies from country to country but it would not be unusual to be able to turn 80% of your debts into cash this way.

Once you have entered into such an agreement with the factoring company, the factoring company now takes over the rights to collect the debt amount from your debtors. Thus your debtors would be informed to make payment to the factoring company instead of your company. So this works out to be a win-win situation for you and the factoring company.

There are many advantages of seeking invoice financing for your business. Among them are:

1. Your business cashflow improves. Instead of waiting the traditional 30, 60, 90 or even more days to be paid according to your credit terms, you can get crucial cash injection into your business through a factoring company within a matter of a few days.

2. You get a more predictable and stable source of cash for your business. You know exactly how much you will be paid by the factoring company because it would be, say 80% of your total invoices.

3. It removes the trouble of debt collection from you so that you can concentrate on other important aspects of your business, like expansion, exploring new business ventures etc. The debt collection now becomes the problem of the factoring company.

4. Invoice financing is much less tedious and stringent than applying for traditional financing like bank loans. To get a bank loan approved, you need to provide collateral, guarantors, have a track record and fulfill many other requirements. But all these are not required for invoice financing because your line of credit is directly tied to your debtors. The more debts you have, the greater the amount of financing you can get. Additionally, you cannot obtain more than the sum total of your debts. In that sense, there is no ambiguity for any party. That’s why obtaining invoice financing is easier than traditional bank loans.

5. Invoice financing is an excellent way of raising cash for ongoing running expenses for your company. Paying for rental, loans, wages, supplies, making daily expenses etc. are part and parcel of any business. Not being able to fulfill these smaller obligations can severely hamper your business.

With that said, invoice financing is usually not suitable for capital expenses such as buying land or heavy machinery. For these sorts of expenditure, you need to seek other financing options. There are many companies that can help, one such company is Link Financial .

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