Invoice financing is a type of finance where a business sells its accounts receivable (or outstanding invoices) to the financier at a discount to obtain immediate cash to boost its working capital. It has been around for centuries and been utilised by many successful businesses.
So how is invoice financing different from Loans
1. Invoice financing involves three parties rather than two parties
- SME who sells its invoice
- Financier who purchases the invoice
- SME’s customer, who is obligated to pay according to the sold invoice
2. Invoice financing converts assets on the company balance sheet into working capital. Whereas Business loans is adding liabilities/debts to the balance sheet of the Company.
3. Upon successful on-boarding processing, Invoice financing usually is able to advance cash to the SME within a day of selling the invoice. Business Loan usually takes a longer time before cash can be advanced to the company.
4. Unlike bank loans, Invoice financing does not require individual legal documentation or covenants for each cash advance. The legal paper work is completed up front during the on boarding process and allows SMEs to sell invoices as and when they need to.
5. Invoice factoring (a form of invoice financing) provides additional services for SMEs, including credit management and invoice collection management.
6. The assessment is based more on the credit worthiness of the client’s customers rather than the SMEs itself. Therefore, the likelihood of obtaining finance is usually higher.
7. Business loans are usually secured against corporate assets and often by personal assets as well.
8. Invoice financing provides working capital that can increase as the business grows and is not limited by the financial status of the business.
Invoice financing is a perfect facility to solve business cash flow challenges. It helps business to improve their accounts receivables, turning outstanding invoices into immediate working capital to help the business organically grow.