The short answer is that invoice finance can be a great solution for companies who sell to other businesses on credit terms.
When an approved client purchases goods or services from a business on credit terms – usually meaning they will make payment in full in 30, 60, or 90 days – they become a trade accounts receivable.
You will often see this on the terms of an invoice when they are listed as payment terms. This is either specified as days as listed above or an explicit date range.
Invoice finance provides the business with an advance payment on its trade accounts receivable.
This advance is usually between 70% and 90% of the account receivable value, with the remaining 10% to 30% (less fees) paid to the business once the account is paid in full by the client.
The entire process is managed by the invoice finance company, which means businesses can focus on selling and fulfilling orders, rather than on collecting payments.
Receivable Finance companies will purchase a company’s accounts receivable for a discount in order to provide the company with working capital.
The smaller the company, the higher the discount rate will be.
The typical discount rate is between 1% and 5% per month.
The invoice financing company will also charge a small administrative fee, which is generally a percentage of the total amount of the receivable, or a flat fee per invoice.
The biggest benefit of invoice finance is that it provides businesses with much-needed working capital. This capital can be used to pay for inventory, expand the business, or cover other expenses.
Another benefit of invoice finance is that it can help businesses improve their cash flow.
Because businesses receive payment for their invoices much sooner, they can use that money to pay their own bills, rather than waiting for their customers to pay.
Invoice finance can also help businesses build their credit score.
When businesses use invoice finance, they are essentially selling their receivables to a third party.
This shows creditors that the business is able to generate enough revenue to pay its bills on time, which can improve the business’s credit score.
Lastly, invoice finance can help businesses manage their growth.
As businesses grow, their accounts receivable will grow as well. If a business does not have the working capital to cover the cost of this growth, invoice finance can help.
There are a few drawbacks to invoice finance that businesses should be aware of.
First, invoice finance can be expensive.
The fees associated with invoice finance can add up, and the interest rates can be high.
businesses should make sure they understand the fees and interest rates before signing up for invoice finance.
Another drawback of invoice finance is that it can hurt a business’s relationship with its customers.
When businesses use invoice finance, they are essentially selling their receivables to a third party.
This can send a signal to customers that the business is struggling to make ends meet.
This could hurt the business’s relationships with its customers, and it could make it harder to sell to those customers in the future.
Lastly, invoice finance can be a risky proposition for businesses.
If a business does not have a good relationship with its invoicing finance company, it could find itself in a difficult position if the company goes out of business or if the terms of the agreement change.
Before signing up for invoice finance, businesses should make sure they understand the risks involved.
An an approved client purchases goods or services from a business on credit terms – usually meaning they will make payment in full in 30, 60, or 90 days – they become a trade accounts receivable.
The business then sells its receivables to an invoice financing company for a discount.
The invoice financing company pays the business an advance, which is usually between 70% and 90% of the receivable value.
Once the client pays the invoice in full, the remaining balance is paid to the business.