Invoice Financing – The Technique of Alternative Financing for Business
by Arina Smith Finance 18 November 2017
Although the bank overdraft facility is the most widely used method of business financing that offers flexibility and ongoing financial support, it can be quite hard work to work with banks. After the global economic meltdown in 2008, banks and institutional lenders have become less friendly to borrowers thereby putting more stress on business finances. It has made it quite difficult for small and medium businesses to arrange for ongoing financial support to maintain the business operations. In the absence of a reliable financial support system, it can become challenging for a small and medium business to run smoothly and survive. Depending on the banks for business finance is no more a viable option for small companies that often bleeds from strained cash flow and desperately looks for alternative sources of funding with better options.
Unpredictable cash flow creates financial stress
Managing smooth cash flow is what every business owner wants, but it can often turn into a nightmare when you suddenly discover significant gaps in demand and supply of money. Since sales invoices remain unpaid until the fulfillment of the credit period, it is quite natural that the financial stress arising from unpaid invoices passes on to the working capital, which always remains in a deficit of the actual requirements.
Business loans are not good enough to provide support because it is uncertain and takes time to obtain and do not serve the immediate purpose. Moreover, such incidents can happen time and again, for which you need a flexible and assured support system that you can fall back upon whenever the need arises. Bank overdrafts may work but can often turn insufficient for the requirements. That is when you would find invoice financing as the right solution to tide over the crisis.
Invoice financing is the technique of using sales invoices to unlock the funds contained therein almost as soon as you raise it. You receive the majority of the money mentioned in the invoice without having to wait for completion of the credit period, which could run into several weeks and months in some cases. Instead of waiting for debtors to make payment, you present the sales invoice to the lender who accepts the document and releases the majority of payment, usually not less than 80% of the invoice value. You can even negotiate for higher payments but have to retain a certain percentage with the lender till the time debtor makes full payment. When the debtor clears the invoice in total, the lender also releases the balance amount after deduction a small fee for the services.
The cost of invoice financing
Invoice financing fees include the service charges of the lender together with interest charged on the sum of funds borrowed. The amount that you pay is much lower than any other borrowings that you might have done. Moreover, the process is very speedy and flexible that perfectly meets the business needs.
The most significant advantage is that it needs no approvals and you receive the funds within 24 hours of submission of the invoice.