Invoice Financing and the way it can Benefit Business Cash Flow
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What is Invoice Financing?
Invoice financing is a common term to explain a variety of asset-based finance facilities, where the businesses sell their assets (invoices) to a 3rd party for a percentage of their value. It is a beneficial financing tool for businesses whose growth is affected by the slow payment of invoices.
Accounts receivables expenditure companies allow the borrower cash collateralized by the business’s outstanding statements — giving the borrower an admirable method of putting more finance into the business directly. With invoice financing, the borrower can easily get a lively advance of about 85% of a number of his statements, with most of the other 15% paid to him in the future. It’s thus the right addition to cover for late-paying customers or the cash flow deceleration.
Types of Invoice Finance:
There are two main kinds of Invoice finance and they are:
1. Invoice Factoring: In an invoice factoring, a business sells its assets (invoice) to a 3rd party (called a factor) at a discount.
2. Invoice Discounting: It is the practice implemented for employing a company’s due accounts received as collateral for a loan purpose.
Requirements & Eligibility:
Some basic requirements for invoice finance are as following:
- Your business trades with other businesses (not consumers)
- You are a Ltd. company or LLP.
- You offer industry standard credit terms
- Few of the lenders have a minimum invoice per month sent per month requirement
- A particular Minimum turnover
How Does Invoice Finance Work?
- You continue your business as was common and invoice your clients/customers
- You then pass the invoice details to the agreed provider of invoice finance.
- The provider pays you an agreed percentage (this varies per company), often within only 48 hours.
- Depending on the agreement, you’ll chase the payment as was common if that’s necessary, or the provider will do this for you.
- You receive the rest of the invoice amount once the invoice is paid, minus any agreed service fees.
Benefits of Invoice Finance
- It’s more flexible than overdrafts or business loans.
- Decisions to lend against invoices may often be done quicker.
- The funding grows in-line with the company’s turnover.
- Normally, you get a higher level of borrowing against the assets.
- Can help to scale back the risks of late payments or defaulted invoices