When looking for an external funding, business owner often overlooks invoices as a source of funds. Forget business loans, explore invoice finance or invoice factoring. It can help your business smoothen the cash flow without bringing in additional debt to the company by turning Invoices into working capital. Let’s explore the characteristics of invoice factoring as well as its benefits and drawbacks.
What is Invoice Finance / Factoring?
Invoice finance, also known as invoice factoring, is one of the traditional business finance solutions which has been around for centuries. It allows businesses to convert their accounts receivable or outstanding invoices into immediate working capital.
Businesses can usually receive up to 90% of the invoice amount, depending on the credit assessment. The drawdown process is quick, upon successful verification of the invoice, funds can be in your business bank account as fast as same business day.
Example of How it Works
- Company ABC delivered water bottles to Cold Storage and issued an invoice with a total amount of $10,000 with a 60-day payment term. However, ABC needs cash to pay off its supplier.
- ABC opt to finance their outstanding invoice through a factoring provider.
- Factoring provider verifies the invoice and advances ABC 80% of the invoice which is $8,000 minus a transaction fee of $150
- ABC can then use $7,850 to pay off its supplier
- On the invoice due date, Cold Storage pays the outstanding invoice to the Factoring company – $10,000. The factoring company returns the balance of $2,000 minus a discount (interest) fee of $200.
At a high level, there are two types of factoring, disclosed vs. confidential facility. Read more here.
Benefits of Invoice Finance / Factoring
Fast, Same day drawdown
The drawdown process itself is very simple. At InvoiceInterchange, we have a purpose-built system that allows you to submit invoices with a few clicks of a button. This gives you full flexibility and control of when you need to drawdown as the lead time to have funds in your account is as little as 4 hours.
No Lock-ins Contract
We understand that cash flow needs for each business are different. Some months you may need a bit more cash injection to support the growing sales, and some months you don’t. This is why we don’t impose any monthly minimum fee or minimum drawdown with InvoiceInterchange. Turning invoices into cash flow whenever you need to.
Facility that Grows with Your Business
Unlike a business loan, invoice finance credit facility grows with your business. As you make more sales and have more invoices in the book, the bigger facility you can have. So that you will always the right funding limit available to support your business sales.
Some of Shortcomings of Factoring
Only Applicable to B2B Businesses with Large Customers
The fundamental of factoring is for businesses to draw down funds against outstanding invoices. This means it is less of a viable funding option for B2C businesses where you receive payment immediately.
Invoice finance providers also usually only fund invoices that are issued to a large reputable company, like MNCs, listed or government agencies. This is to minimise any potential default.
Not Suitable for Investment Usage
If your business is looking to obtain working capital to fund a large project that provides a return in a longer-term (e.g.in years) like R&D activities and property investment, then invoice financing will not be the suitable funding solution. As the facility is best to help smoothen business day-to-day cash flow.
Find out more about invoice finance products by speaking to one of our team members today.
INVOICE FINANCE FOR YOUR BUSINESS