What is Invoice Financing?

Invoice Financing Definition

Businesses do not get upfront payment against the Invoices for the selling transaction of the goods owing to which a temporary shortage of funds is created in the company. A temporary shortage of funds leads to instability of the cash flow in the company making it troublesome for the company to take care of its daily expenditures like paying salaries to its employees, buying raw materials for production, paying suppliers, etc.

Under this circumstance, the companies can use such unpaid invoices for invoice funding whereby unpaid invoices can be provided as a security to the financial lender and the payment can be received against the unpaid invoices.

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What is Invoice Financing?

Invoice financing is a type of short-term borrowing whereby the financial lenders provide payment for the unpaid invoices to the companies to overcome the temporary shortage of funds and stabilize the cash flow in the company.

Invoice Financing is also known as Invoice Funding or Invoice Factoring.

What is the process of Invoice Financing?

The stepwise processing of Invoice Financing is detailed as follows:

  1. A Company (Seller) does a selling transaction by selling its goods to its customers (Buyer) against the agreed credit terms and raises an invoice to the customer.
  2. The seller may be unable to wait until the credit term for the payment as it needs to pay the salary to its employees, suppliers, etc. Thus, the seller decides to use the unpaid Invoice as a financial instrument to obtain the payment against it.
  3. The seller provides the unpaid invoice as collateral to the financial lender, who in turn buys the invoice and provides advance cash against it to the seller. The financial lender usually provides 80% of the invoice value to the seller after deducting a nominal fee.
  4. Once the credit term for the invoice matures and the buyer remits the payment against it to the financial lender, the balance of the invoice value is paid to the seller after deducting the service fee.

The entire process of Invoice Financing/Invoice Funding can be undertaken by the seller or the financial lender.

What are the Advantages of Invoice Financing?

  1. Obtain an Advance payment: The seller can receive an upfront payment against the unpaid invoices without having to wait for the credit term.
  2. No collateral or documentation: Seller is not required to provide any collateral or carry out any tedious, cumbersome documentation for the Invoice financing.
  3. Ease of responsibility: Financial lenders manage everything from start to end of the Invoice Financing process and the seller is at ease.

What are the Disadvantages of Invoice Financing?

  1. Pay Fees: The seller must first pay the nominal fee while receiving 75 - 80% advance payment against the unpaid invoice and then pay the service charge while receiving the balance payment.
  2. Sign a Contract: Usually, the seller must undergo a long-term contract with the financial lender whereby they are obligated to work with them for all invoice financing matters.
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