Invoice financing can be a highly useful tool for start-ups looking to raise capital quickly, yet a large number of business owners don’t consider it as an option when they’re attempting to increase their available funds. In fact, many don’t even know what it is…
What is Invoice Financing?
Invoice financing is an asset-based means of borrowing capital. The way it works is that a third party, known as an invoice financier – either a banking or independent financial institution – purchases unpaid invoices from a business, thus granting them instant capital for their customer’s outstanding debts. Many businesses find it useful to use free broker services such as through Touch Financial to assess which lenders will offer the best services and rates.
There are two types of invoice financing: factoring and discounting. Factoring is when an invoice financier takes over a company’s sales ledgers, purchasing their debts and assuming responsibility for the collection of them. For every debt that is created, they offer up to 100 per cent of its total upfront, with the remaining amount awarded to the business owner once the debt has been paid off. This would mean that a debt of £20,000, for example, would result in an initial grant of £17,000, with the remaining £3,000 paid once the debt had been redeemed. Once this had been awarded, the business would be expected to pay the invoice financier any interest and fees owed on the sum.
Invoice discounting works a little differently: rather than taking control of the debts and assuming responsibility for them, the financier lends money against them. The business owner pays this back as the invoices come in, which reduces their debt and allows them to receive funding towards newer invoices. Again, a fee is charged for this service.
How Could Invoice Financing Benefit Your Business?
Although not without its risks and disadvantages, invoice financing can have many boons for financially savvy businesses. Perhaps the most obvious is that it is a way of securing immediate finance for your enterprise; rather than having to wait for customer debts to be redeemed, the money is made available straight away, freeing it up for further investment and the clearance of any unsettled debts on your own part.
As a finance option, invoice financing has many advantages over its counterparts, the main one being that it is far less risky than a lot of traditional finance options, as you’re borrowing money that you know you will receive, as opposed to offering assets as security in case your repayments are not on time. This significantly lessens the risk of you defaulting on payments and having to face the consequences of such an act.
In the case of factoring, there is the added boon of a reduced workload for you as the business owner. The responsibilities of managing and collecting debt no longer fall on your shoulders, but rather on the financier, freeing up your precious time. Invoice financiers are also likely to take over the responsibility of performing credit checks on your customers, which not only ensures a customer base that is less likely to default, but also saves you the hassle of having to consider whether you need to perform such a task in the first instance.
Invoice financing, then, can make a truly useful tool in a business’ endeavors to raise funds, saving time, freeing up capital and offering a relatively low risk source of finance. If you own a business that’s in need of a little boost, could it help you?
Photo credit: Lending Memo