Invoice finance is a type of business financing that allows companies to borrow against the value of their outstanding invoices.
It is a form of asset-based financing that provides businesses with immediate access to cash, based on the value of their outstanding invoices, rather than having to wait for their customers to pay.
There are two primary types of invoice finance: factoring and invoice discounting.
Is when a business sells its invoices to a factoring company, also known as a factor.
The factor pays the business a percentage of the value of the invoices, usually around 80-90%, upfront, and then collects payment from the customers directly.
The factor then pays the remaining balance, minus a fee, to the business.
Is when a business borrows against the value of its invoices but retains control over the collection process.
In this case, the business receives a percentage of the value of the invoices, usually around 80-90%, upfront, and then collects payment from the customers directly.
The business then repays the loan, plus interest and fees, to the lender.
Both types of invoice finance can provide businesses with immediate access to cash, improve cash flow, and reduce the risk of late or non-payment from customers. They can also free up time and resources that would otherwise be spent on managing and collecting outstanding invoices.
Invoice finance is typically used by businesses that have long payment cycles, as it provides immediate access to cash, rather than having to wait for payment from customers.
It can be particularly useful for businesses that are growing rapidly, as it provides a flexible source of financing that can be scaled up or down as needed.