Cash-strapped businesses tend to struggle to meet day-to-day operations. Invoice financing is a short term financial solution offered to businesses to ensure that their cash flows do not stagnate while waiting for payments.

What is invoice finance?

Invoice finance is a non-debt alternative to funding requirements that a business may have. It involves selling outstanding invoices in exchange for immediate funds. More often than not, customers choose to extend their credit period. This, in turn, hurts the business’s cash flows and may very well impede its growth. Invoice financing allows the business to have sufficient cash to carry on its day-to-day operations.

Advantages of invoice finance

  • Availability of quick and immediate funding

Once the contact is made with a finance provider, the invoice financing facility can be set up as quickly as two weeks. Once the arrangements have been made with regard to the invoice financing facility, the funding can be obtained almost immediately. Within 24 hours of the issue of the invoice to the customer, funding can be availed, thus ensuring that the business is not cash-strapped but instead has a healthy cash flow cycle.

  • Better cash flows

More often than not, funds are frozen because of the outstanding invoices which have remained unpaid over a long period. This directly impacts the health of a business’s cash flow cycle since it blocks the inflow of cash, thus restricting the business from carrying on its regular operations with ease.

  • Collateral-free

In most invoice financing arrangements, the only security that is offered up in exchange for funding is the invoices. This would make invoice financing appealing to businesses that have assets that are small and few since they are unlikely to be eligible for traditional financing methods.

  • Flexible terms

Small and medium-sized businesses always prefer flexibility when it comes to financing. Invoice financing offers flexibility since the businesses are allowed to sell their invoices as and when they wish to do so. There is no compulsion or obligation. There is an element of transparency with regard to the fees and processing charges pertaining to invoice financing.

  • Confidentiality

Invoice financing offers the feature of confidentiality wherein the agreement may also allow the customers not to be made aware that their invoices have been sold. The businesses that opt for this can exercise complete control over the process with regard to invoice financing. Moreover, it also allows them to exercise control over their relationship with their customers.

Disadvantages of invoice finance

  • Additional costs incurred

While the costs involved with invoice financing have fallen in recent times, it is not exactly the cheapest source of finance available. Different finance providers will charge and bill the businesses differently.

  • Solves a very specific problem

Invoice financing provides a short term solution to a very specific problem – poor cash flows. Aside from ensuring regular cash flows, it does not eliminate or fix any other problems. It does not fix the problems of late payments or non-payments from customers.

  • Customers may know the arrangement

If the business opts for invoice discounting, the responsibility of collection still rests with the business. Therefore, the customers will not know the invoice financing arrangement. However, invoice factoring will require the factor to deal with the customers directly. The factor may undertake methods that are not very flexible, thus damaging the relationship between the business and the customers.

  • Invoice financing is available only for Business-to-Business (B2B) invoices

Commercial invoices, where the customers are other businesses, will be eligible for availing the invoice financing facility. Businesses that sell products to the general public will not be eligible for the same.