What Is Invoice Financing?

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Invoice financing is a term that you will always encounter in almost every business. This process involves using your accounts receivable as collateral for your loans. 

The Invoice Financing

It can also refer to borrowing money from the account, as mentioned earlier. There are specific nuances from these functions, though, as it can still get quotes confusing. However, it is an integral part of a business because you will need to face it one way or the other.

As business owners, we are inevitably going to end up borrowing money. You might think that the most successful companies in the world do not do that. On the contrary, they do have loans as it is necessary for them to operate.

It can be plain cash, and they receive that as capital or payment for services. Other forms may include human resources, equipment, or anything that can be exchanged for money. However, there are also cases wherein we are the ones doing the lending. 


Loans For Business

In every kind of product or service, there is a corresponding payment. As a company, you need to collect this so that you will be able to use that money in some way. However, this instantaneous collection may not be possible all the time. 

Some services may be paid after all the needs are met. You can certainly add this future income in your accounts receivable, but it cannot stay there for long. After all, there are other operations in the company that needs to work even if there is still no income.

This is where invoice financing comes in. Even if you do not have the money from the income yet, you can lend the cash from another (usually lending) firm. This way, you will have something that you can use while you are still waiting for the payment. In other words, you will be withdrawing the profits in advance through third-party financing.

Doing this will also normalize your cash flow and fix your accounting books. Remember, the numbers there will not reflect the cash on hand. Waiting for the income to arrive would waste your time, and you could end up losing more money. 


Options For Lending To Consider

There are two ways that this borrowing process can be done. First is invoice factoring, which lets you transact your outstanding invoices to a lending firm. Only a part of the total amount can be lent out, usually 70% to 85%. 

Once the invoices have been paid off, it will be the lending company that is going to collect it. The remaining 15% to 30% will be returned to the company after fees and other deductions have been processed. However, this might reflect poorly with the company as a third party is collecting their fees.

Some companies also opt for invoice discounting. This method is similar to the previous option, but there is one significant difference. It is the company that is going to collect the payments. The lending firm can cover up to 95%, but this depends on the arrangement between the parties involved. They need to pay the deductions and processing fees to the lending firm. 

Final Thoughts

You might think that this is the perfect system. After all, you do not need to worry about the unearned income. As long as you have a stable cash flow, you can still function as a company. However, it can be complicated if the receivables do not arrive (i.e. you did not get paid) so be sure that you give it careful thought. Your inability to pay on-time because of collection delays might involve other parties.

You can manage your finances with the help of an accounting firm. With her experience of helping businesses achieve profitability in challenging times, Annette Ferguson – a Chartered Accountant and Certified Profit First Professional – can assist you in unlocking financial strategies to boost business profitability. Request an appointment todayOur YouTube channel is also available for subscribers, as are all of our social media channels.

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Annette Ferguson

Annette Ferguson

Owner of Annette & Co. - Chartered Accountants & Certifed Profit First Professionals. Helping Online service-based entrepreneurs find clarity in their numbers, increase wealth and have more money in their pockets.