Understanding Invoice Financing
Business owners face cash shortages and cash flow problems from time to time. This mostly occurs when you haven’t been paid for your product or services by your client. If your client is making the payment in say, a month, you will have to look for other options to finance yourself in the meantime. There will be employees to pay and fees for electricity and transportation; the daily operational costs of a company.
In such an instance, you can make use of invoice financing. This is when a third party or a provider buys your unpaid invoices and issues you a certain fee. Factoring and discounting are two types invoice financing. Generally, the providers accept commercial invoices and not the ones that you issue to the general public. They can be used by a large number of companies. You will find that this method is quite beneficial for small business owners as well.
Accounts receivable factoring is when the provider manages the sales ledger of the borrowing company. They will own the invoices and proceed to collect the payment from your clients directly. In this method, your clients will know that you’re using invoice financing for your transactions. The provider will buy the debt the client owes you and then collect it from the client. There will be a certain deduction of the original amount. The amount that you receive is based on the provider that you use and the creditworthiness of your client. You will be able to outsource the management of your sales ledger and also potential customers will be subjected to a credit check. This will make sure that you deal with customers who are reliable. But the customers may prefer dealing with you and not the provider.
Invoice discounting is when the provider lends you an advance against the unpaid invoices you have. It will be a little less than the total value. The percentage will differ according to the creditworthiness of your clients and the provider that you do business with. But in this instance, you still maintain the relationship with your client and they will deal directly with you. They will not need to be notified of the invoice financing either. This confidentiality will be an advantage to you. But the responsibility of collecting the debt from your customers still falls to you.Invoice trading is quite similar to factoring. What makes it different from factoring is that it uses online platforms. This way you can deal with individual investors or groups of investors instead of the traditional providers. It is more in line with peer-to-peer lending. You will be able to pick which invoice you want to sell. But you will not be dealing with your customers directly in this method.