Invoice funding
Invoice funding
What Is Invoice Funding?
Invoice funding, also known as invoice financing or accounts receivable financing, is a method used by businesses to manage their cash flow and maintain steady cash streams. Companies sell their outstanding invoices at a discount to a third party, called a funding company or factor, for immediate cash. This method is particularly beneficial for businesses that need to quickly access money instead of waiting for their customers to pay within the usual credit term periods.
How Does Invoice Funding Work?
Invoice funding begins when a business sells a product or service and bills the customer, creating an invoice. Instead of waiting for the customer to pay, the business sells this invoice to a funding company. The factor provides an advance, typically 70% to 90% of the invoice’s value, within a short period, often within 24 hours. When the customer eventually pays the invoice, the funding company will remit the remaining balance to the business, minus a fee for the funding service.
The Benefits of Invoice Funding
There are multiple advantages to using invoice funding. It boosts cash flow instantly, helps businesses meet operational costs, and allows them to invest in growth opportunities without the wait. It also saves time and resources that would be spent on chasing down payments. Furthermore, because funding is based on the clients' creditworthiness, even new or small businesses can access financing as long as they have creditworthy customers.
Comparing Invoice Funding with Financial Factoring
People often confuse invoice funding with financial factoring, but they are not identical. The primary difference is in the responsibility for collecting the invoice payment. With invoice funding, the original business usually retains control of the sales ledger and chases the payment themselves. In contrast, with financial factoring, the factor takes on the responsibility for collecting the debt, often meaning the customer is aware that the invoice has been financed.
Choosing the Right Invoice Funding Company
Selecting the right funding company is crucial. You’ll want to consider their fees, the percentage of the invoice value they’re willing to fund upfront, their reputation, and the terms of their service agreements. Finding a partner that matches your business's values and needs can lead to a beneficial long-term relationship that supports your financial health and growth.
Is Invoice Funding Right for Your Business?
If you're experiencing cash flow challenges or are looking to grow your business without taking on debt or giving up equity, invoice funding could be a viable solution. Evaluate your company's financial situation, the quality of your accounts receivable, and your customers' payment behaviors to decide if this type of funding aligns with your business objectives.
