When in search of external funding, business owners often overlook unpaid invoices as a source of funds. Instead of the cumbersome process of applying for business loans or overdrafts, it is worth considering invoice finance, or factoring. It can help inject immediate cash into your business and smoothen cash flow without adding debt to the company. In this article, we will explore the characteristics of invoice finance as well as its benefits and drawbacks.
What is Invoice Finance / Factoring?
Invoice finance, also known as invoice factoring, is a business funding solution that has been around for decades. It allows businesses to convert their accounts receivable or outstanding invoices into immediate working capital.
Businesses typically receive up to 90% of the invoice value upfront instead of waiting for 30, 60, or even 90 days to get paid. The drawdown process is quick – upon successful verification of the invoice, funds can be in your business bank account as fast as the same business day.
Example of How it Works
- Company ABC delivered water bottles to Cold Storage and issued an invoice with a total face value of $10,000 on a 60-day payment term. However, ABC needs funds earlier to pay its suppliers.
- ABC opts to finance its outstanding invoice through a factoring provider.
- Factoring provider verifies the invoice and advances ABC 80% of the invoice i.e. $8,000 and less a transaction fee of $150.
- ABC now has $7,850 in the bank account to pay its suppliers.
- On the invoice due date, Cold Storage pays the outstanding invoice to the Factoring company – $10,000. Factoring company settles the 80% financing and returns the 20% remaining invoice balance of $2,000 less a discount (interest) fee of $200.
Benefits of Invoice Finance / Factoring
Fast, same-day drawdowns
The drawdown process itself is very simple. At InvoiceInterchange, we have a purpose-built invoice finance system that allows you to submit invoices with a few clicks of a button. This gives you full flexibility and control over when you need to draw down funds as the lead time to have funds in your account can be in as little as 4 hours.
No contract lock-ins
We understand that the cash flow needs for each business are different. In some months you may need some additional cash injection to support growing sales or operations, but in other months you may not. This is the reason there are no minimum monthly fees or minimum monthly drawdown amount requirements with InvoiceInterchange.
A funding source that grows with your business
Unlike a business loan, an 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 have the right funding limit available to support your business sales.
Some Shortcomings of Factoring
Only Applicable to B2B Businesses
The underlying asset in factoring is trade receivables and businesses can release funds that are tied up in trade receivables. These are normally businesses that sell to other businesses on terms and the creation of B2B invoices. This means it is less of a viable funding option for B2C businesses where they receive payment on goods on services rendered immediately and not on terms.
Invoice finance providers also usually fund invoices that are issued to larger organisations or reputable companies, like MNCs, listed or government agencies. This is so they can leverage the credit strength of your customer in the assessment of your invoice finance application.
Not suitable for larger one-off cash requirements
If your business is looking to obtain a lump sum of cash for a relatively large upfront investment into a project that provides a return in the longer-term (e.g.in years) like R&D activities purchase of machinery, property renovations, or investment, then invoice financing may not be the suitable funding solution. This is because an invoice finance facility is a rolling and ongoing source of funding more suited to help smoothen day-to-day cash flow.
Find out more about our invoice finance products by speaking to one of our team members today.