Simply put, Invoice Finance refers to the short term loan provided by various financing companies to supplement a business with working capital. When a business provides a product or service to a company it issues an invoice to the buyer. Depending on the nature of business, there can be several situations when the business receives the payment in a time of 30-90 days. While the payment is being processed, the business would often require working capital to maintain itself for those 30-90 days. Invoice Finance is a loan provided by financial institutes utilizing the unpaid sales invoices as collateral.
Pros and Cons
While Invoice Finance allows business to raise working capital from their sales ledger it has several drawbacks as well.
- By taking a loan against the unpaid invoices you might be able to receive instantaneous working capital and cash flow into your business, but it will also deprive you of the profits from those unpaid services or orders.
- It allows for financing to be done confidentially and the deals will not be made public. Nevertheless, one should be aware that several financing companies only accept commercial invoices and the companies that sell directly to the consumers may not be eligible to receive any finance.
- Invoice Finance helps a business maintain a much closer relationship with the customers as the client’s accounts are still maintained by the company. However, it can also cripple the organization in its absence as the company adapts to the improved cash flow provided by the additional finance.
- Despite of Invoice Finance being similar to factoring, the credit control remains essentially in the hands of the business owners and not the financing company. But, invoice financing can also limit the number of ‘book debts’ in the company’s ledger and can affect the possibility of future funding.
When to Use
Using invoice financing is simply like receiving an advance payment for the money owed to you and thus provides that extra bit of cash flow you needed to make day to day operations possible. As compared to an overdraft or loan, you do not need to repay the money you have borrowed as it is simply a part of your own sales ledger. Waiting for payments can be a real problem and can limit the company’s daily operations by limiting the cash flow due to pending invoices.
This payment gap can be damaging to a company’s workflow and particular the Small media enterprises can suffer vastly due to the waiting payment period. The finance company will usually charge a monthly fee for the loan and interest of the amount borrowed on the pending invoices and can also deny the loan if the applicant is at a credit risk. The finance company may also require the business to present a regular report on the sales and credit control process which is handled entirely by the business owners.
Invoice Finance is usually provided to the business organizations with annual sales turnover to be higher than $250,000 as finance companies need to be ensured of the business owner’s ability to manage their own sales and credit control