Invoice Financing: Definition, Structure, and Alternative

13 Jun, 2022 5:01 pm

invoice financing definition

It’s common for companies, especially business-to-business companies or service providers, to allow customers to buy products or services on credit. This means that there is a period of time during which the company can expect to be paid a certain amount of money but cannot access it until the customer pays the bill. When considering invoice financing or any alternative financing option, it’s essential to assess your business’s specific needs, cash flow patterns, and repayment capacity.

invoice financing definition

There are resemblances between invoice financing and short-term credit facilities. In its core structure, invoice financing is anchored to a specific invoice or a set of receivables. This invoice acts as security, invoice financing definition prompting the finance entity to provide the invoice-owning business with a cash advance. In exchange for this advance, businesses remit a portion of the invoice value to the financier as a service charge.

Are there costs involved in invoice financing?

Net 30, or 30 days, is a common amount of time given to pay invoices, but choose payment terms that make sense for your business, your customer, and the transaction. Options range from requiring payment in advance to net 90 terms which give customers 90 days to pay outstanding invoices. The cost and complexity of a project may factor into the payment terms you choose.

invoice financing definition

B2C (business to consumer) companies looking for financial help may be out of luck, especially if their cash flow originates at a point-of-sale machine rather than long-term invoices. Invoice financing can be a good idea for businesses that need to cover cash flow gaps, but it can also be expensive. You’ll want to consider the nature of your business, your industry and the urgency of your funding needs to determine if invoice financing is right for you.

Traditional Invoice Financing

The first step in the invoice financing process is to submit your unpaid invoices to the financing company. This can typically be done through an online platform or by providing electronic copies of the invoices. Ensure that all the necessary information, such as invoice number, customer details, payment terms, and invoice amount, is included.



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