Invoice financing is no doubt a favorite option used by business owners to raise their needed cash and capital for their varying operational needs. Despite its popularity and wide usage, there are entrepreneurs who still feel confused about it and much of the general public does not even know that such a thing exists. Luckily, the team at Working Capital Partners has the following facts and details ready for us to peruse to answer whatever question runs through our heads.
Per definition, invoice financing is a type of third party finance where the provider agrees to buy a company’s unpaid invoice or group of invoices in exchange for a certain fee. There are two main types to it. The first is called factoring while the second is referred to as discounting.
In factoring, the responsibility of collection from the unpaid invoices is passed on from company to financial provider where the latter performs all the tasks required to collect from the owing customer. Moreover it pertains to the sale of an asset since the right to collect is sold to the financer in exchange for the amount of cash advanced.
Discounting on the other hand leaves the task of payment collection to the company. Plus, it acts akin to a loan albeit it does not have the same ties as it does not involve collateral and interest. The amount allowed to be taken out will only be equivalent to the value of the invoices which will act like collateral. Upon collection, the company is responsible to pay back the financial provider with the amount advanced plus fees.
What makes invoice financing tick is the very fact that it does not have the usual consequences or effects that most forms of credit bring about. It does not involve property collateral so there is no risk of foreclosures. There are also no interests involved. Plus, it does not show up in the company’s books as a liability or debt but rather a decrease in trade receivables accompanied by an increase in cash. This makes the company more attractive to investors.
Moreover, invoice financing helps hasten up collection and receivable turnover. The entity’s cash flows are also improved by freeing the locked up cash within unpaid customer receivables and invoices. Furthermore, the process of application to approval is pretty fast unlike traditional financing methods making it a viable option for emergency needs and expenditures.
All of these, according to Working Capital Partners, are only some of the many reasons why invoice finance is a favorite among many entrepreneurs today.