What is Invoice Financing and How Can It Help Your Business

what is invoice financing

Choosing which type of credit loaning option is best for your company is highly crucial. If you’re thinking what is invoice financing, then you’re at the right place. It is a credit lending option, extended by financial services to its customers against outstanding invoices. This lets small business owners secure funding without taking on additional debt. Invoice financing is basically carried out to meet immediate cash requirements of small to medium businesses.
Essentially, these facilities lend capital against the unpaid invoices taken as collateral. Unpaid invoices are still account receivables, just at a later date. So if a business is in requirement of a principal amount, they can certainly go for invoice financing to meet its present liquidity requirement.


Who should apply for Invoice Financing?

Invoice financing is a good option for small or medium sized enterprises (SMEs). Usually, these businesses do not have large cash inflow or reserves at all times. They struggle to make payments to employees or buy equipments to run their businesses and have to wait around for due payments by customers.

Also, companies with low credit scores (CIBIL score) are not considered great candidates for business loans. Invoice financing opens a path for these enterprises to not get tied up in due funds which can otherwise be used to expand its operations.


Two distinct ways of Invoice Financing

It is not only about what is invoice financing, but also what all it entails. Invoice financing stands for a collective term and can be done in two ways:


Invoice Factoring

This type of invoice financing is an arrangement for a company to sell their accounts receivable to a financial institution. The lender may pay up-to 75 percent of the full amount of what the unpaid invoices are worth to the borrower.

The share and interest varies from one institution to another. The remaining percentage of the amount is
receivable once the invoices have been fully paid and recovered by the lender.

Factoring is rather easier than other conventional credit financing, since you’re essentially selling an asset instead of exchanging it as collateral for a loan.

Also qualifying for invoice factoring is relatively simple and quick. Thus invoice factoring provides with immediate funds that can be used to pay the company expenses and improve working capital.


Invoice Discounting

In Invoice Discounting, the company could get as much as 90 percent of what the unpaid invoices are originally worth. Here, the receivables are usually held as collaterals and the business can pay back to the lender only when the customers have cleared their dues.

Invoice discounting is also usually done by the companies that are larger than those applying for factoring. This method also allows for the borrower to have control over its clients since the invoices only act as a collateral and not owned by the lender.


Benefits of Invoice Financing

  • Invoice Financing allows enterprises to improve their working capital, thus generating funds and clearing the company expenses.
  • This benefits the lenders as well, because in Invoice Financing the outstanding invoices are taken in as collateral. Thus even if the borrower fails to repay the capital can be collected by the invoice clients. A much less risk is involved than there would be with an unsecured business loan.
  • This working capital option hereby allows you to escape from being in debt contrary to other traditional line of credit facilities.
  • The immediate funds thus generated can help you make rent, pay out employees or any other expense, hence becoming independent from due customer payments.


Thus, before jumping on to any line of credit option, first fan out your accounting history and credit worthy clients. Delve deep and learn what is invoice financing and ensure you’ll be able to repay the credit with capital generated from clients within the agreed period of time. Consider and classify your requirements as long-term or short-term and accordingly apply for the type of Invoice Financing that suits the best.

About Sreeram Sreenivasan

Sreeram Sreenivasan is the Founder of Ubiq, a business dashboard & reporting platform for small & medium businesses. Ubiq makes it easy to build business dashboards & reports for your business. Try it for free today!