Invoice financing is when funds are advanced against the invoices that a company has generated. With long payment terms it could be 30, 60 or 90 days before you can expect payment, which may be too long to wait in terms of your outgoings. Invoice financing allows you to borrow a percentage of the value of your invoices, paying off the loan as soon as the invoice is paid.
This enables funds to be advanced against the invoices that a company has generated. Depending on credit terms or behaviour, sometimes it can be 30, 60 or 90 days before a customer makes payment. This can stretch working capital as businesses will almost certainly have payments to meet in the meantime associated with the customer product or service delivered. Invoice financing allows companies to borrow a percentage of the value of its invoices. This advance is then paid off when the customer makes the invoice payment. The balance is then paid to you, less any finance costs.
There are 3 main categories of invoice finance:
Factoring: whereby the funder manages credit control and payment collection procedures. The lender will typically use their own credit control teams, or an outsourced provider, which will chase debtors on your behalf and ensure the invoices are paid.
Invoice discounting: where you as the customer undertake your own credit control processes and management.
Single invoice financing: Most invoice finance providers operate on a ‘whole turnover’ basis, i.e. all invoices need to be run through their facility. Increasingly, single invoice providers are delivering a flexible approach where a company can pick and choose which invoices it wants to be financed. This can be a more cost-effective approach, depending on frequency of use.
Invoice finance can operate confidentially or on a fully notified basis (to the end customer). Use of credit insurance can also help to manage bad debt risk.