What is invoice financing?

A business can borrow money against the amounts customers owe through invoice financing. IF helps companies get more cash, pay their workers and suppliers, and invest in growth and operations faster than they could if they had to wait for customers to pay off their debts in full. For borrowing money, businesses pay a fee to the lender that is a particular portion of the bill amount. Issues with customers who take a long time to pay or have trouble getting other business credit can be solved with invoice financing.

You can also call invoice financing “accounts receivable financing” or “receivables financing.”

How to Understand Invoice Financing

Often, companies sell things or services to big customers like retailers or wholesalers on credit. For this reason, the customer does not need to pay right away for the things they buy. The company that bought something gets an invoice with the total amount due and the date the payment is due. But giving customers credit means that a business can’t use the money it could otherwise use to spend or grow. Businesses may choose to finance their invoices to pay accounts due that are taking a long time to settle or to meet short-term cash flow needs.

When a lender gives invoice financing to a business user based on unpaid invoices, the business can borrow money quickly. A company can improve its working capital by selling its accounts receivable through invoice factoring. This gives the company instant cash that can be used to pay its bills.

From the lender’s point of view, invoice financing

When a business borrows money through IF, the invoices are used as security. This differs from a line of credit, which may be unsecured and leave the lender with few options if the business doesn’t repay the loan. The lender lowers its risk by not giving the borrowing business the total payment amount. However, not all danger is gone with invoice financing because the customer might not pay the bill. This would make it complicated and expensive for the bank and the business to finance its invoices with the bank to get paid.

How to Set Up Financing for Invoice

Different ways to set up invoice financing exist, but the most popular ones are factoring and discounting. A company sells its unpaid bills to a lender through invoice factoring. The lender may pay the company 70% to 85% of what the bills are worth upfront. If the lender gets paid in full for the invoices, it will send the business the remaining 15% to 30% of the invoice amounts. The business will then pay interest and fees for the service. The customers will know about this deal because the lender takes payments from the customers. This could make the customers feel wrong about the business.

A business could also use invoice discounting, like invoice factoring, but the business, not the lender, receives customer payments. This way, customers don’t know about the arrangement. With invoice discounting, the lender gives the company up to 95% of the payment amount as cash. When customers pay their bills, the business returns with fewer fees or interest to the lender.

Conclusion

• A company can borrow money using past-due bills as security with invoice financing.
• Companies can use invoice financing to get more cash for running their business or to speed up their plans to grow and make investments.
• Invoice financing can be set up so the buyer doesn’t know their bill has been financed, or the lender can take complete control of the process.