What Is Invoice Financing?

A penny saved is a penny earned – true – but sometimes it is hard to save big, and at the end of the day you find those pennies are a useless nest egg for your business.

You need something to run your business without being worried about your customers paying and being able to purchase what you need from suppliers.

Invoice financing can be a ring fence for your business. Read on to learn more about this option.What Is Invoice Financing?

Invoice Financing (also known as Accounts Receivable Financing, and Receivable Financing) is a way companies are able to borrow money from a lender. This helps the company improve its cash flow and stay afloat.

Companies borrow this money against the amount due from their customers. It is used to pay the workforce, suppliers, and to reinvest in operations.

Invoice Financing keeps the company safe from an internal crisis, especially if they cannot wait for their clients to pay.  It is not to be confused with Invoice factoring.

In the process of invoice financing, you sell your unpaid invoices to a third party: a bank or an independent financial institution. As you don’t have to be worried about your future flow of income, your bank takes care of the payments to be made to your suppliers.

To further understand the invoice finance concept, we break down the three types:

Three Types of Invoice Finance

Invoice Factoring

Invoice Factoring is a type of finance solution for industrial sectors such as manufacturing or clothing, where accounts receivable is usually a part of the business cycle. Invoice factoring operates by providing a money advance in line with the total worth of the invoices. You generally get 50-80% of your invoice value in advance. You get the remainder of the value as soon as the client pays the invoices, excluding an invoice factoring fee. Get more financing details here.

Invoice Financing 

Invoice Financing is similar to invoice factoring with the exception that it’s not a sale of the accounts receivable. You take advantage of the accounts receivable as security to get the cash upfront, and you’re eventually answerable for managing the customer payments and relationships. If the customers are unable to make payments on time or they become delinquent, you’ll be accountable for the particular amount you were advanced. The charges are generally 2-4% of the invoice worth each month.

Receivable Based Credit Line 

Receivable Based Credit Line is a line of credit based on a particular percentage (generally 80-85%) of the worth of the outstanding invoices. The additional value is determined in line with the “ageing” of your invoices. Specifically, they offer a 100% value for your current invoices and a discounted price for delinquent invoices. You’ll pay a new pre-negotiated rate of interest based on the account balance. The remaining balance is reduced when an invoice gets paid. There is normally a fee once you use your credit line. However, this is generally a less costly option as compared to accounts receivable factoring or invoice financing with annual percentage rates less than 20%.

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