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Invoice Financing: A Complete Guide for Business Owners

invoice financing definition

Invoice financing and factoring arrangements have become increasingly popular among businesses over the last few years. With bank loans harder to come by, invoice financing allows businesses to unlock the cash tied up in their outstanding invoices without having to take on long-term debt. With invoice factoring, you sell your invoices to a factoring company at a discount.

  • SME invoice financing is one of the non-banking funding sources which are filling the need for capital for smaller businesses or new businesses without a long track record.
  • It’s used commonly in industries with long billing cycles, such as clothing, retail, manufacturing, etc.
  • Invoice financing offers diverse structures, predominantly through factoring or discounting mechanisms.
  • Invoice financing can be structured as a loan or as a line of credit, sometimes called an accounts receivable line of credit.
  • The total cost of your funding will vary, however, based on the structure of your loan, the size of your request and the payment speed of your customer.

How does accounts receivable financing help manage outstanding invoices?

The factoring company pays you a portion of the invoice’s value and then takes over its collection. After the company receives payment from your customer, it sends you the rest of your money, minus the agreed-upon fees. To qualify for invoice financing, you should have creditworthy customers who have a history of paying on time.

invoice financing definition

Optimise working capital:

While you can manually manage your accounts payable process, this approach can be time-consuming and error-prone. A better way to keep track of accounts payable is by using specialised accounts payable software that tracks and pays your invoices for you. The platform goes beyond accounts payable features, also offering business accounts and cards, features to optimise cash flow management, powerful accounting automations, fast transfers and storefront integrations. invoice financing definition Juni’s platform for ecommerce entrepreneurs comes with automated accounts payable features that can help you run simpler, tighter and more accurate financial admin. With Juni, it takes just seconds to auto-collect, pay and even finance your invoices. Invoice factoring is an agreement with a third-party company (the “factor”) to purchase your accounts receivables at a reduced amount of the face value of the invoices (typically 70% to 90% of the total).

Trade credit insurance as an alternative financing option

When your customers eventually end up paying the factoring company, you will receive the rest of the advance. An accounts receivable line of credit is similar to invoice discounting, but it works slightly differently. We must also understand how invoice financing assumes significance in working capital management in the first place. In many businesses, including the export sector, customers do not make their payments at the time of purchase of goods.

While in non-recourse financing, the invoice is no longer a receivable on the seller’s balance sheet, and the financier is liable to chase buyers for repayments. In Recourse Financing, the financier has the right to sell back the invoice to the business if its’ buyer fails to repay. However, with non-recourse financing, the receivables ownership is fully transferred to the financier.

invoice financing definition

The Role of Factoring Companies

invoice financing definition

To break down the financial dynamics, let’s evaluate a theoretical scenario involving an architectural firm wanting to monetize a $50,000 invoice. A financial institution agrees to advance 80% of the invoice’s value, summing up to $40,000. In exchange, the architectural firm commits to a 0.5% processing fee and a 1.5% weekly factor fee on the remaining balance. It provides immediate liquidity, enabling businesses to maintain operational efficiency, fulfill financial commitments, and capitalize on growth opportunities, even amidst delayed payments.

invoice financing definition

How to choose an accounts payable software platform in 4 steps

How can you qualify for invoice financing?

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