Of the various short term loans available with banks and lenders, invoice finance is a kind in which businesses use their invoices to unlock cash thereby speeding up cashflow. They do this by selling their invoices to a third party in exchange for some advance cash the invoice is worth.
It is a way for small businesses to take a loan against the amount due from their customers. Not only does it helps improve your cash flow, pay your employees and suppliers, it also can be reinvested in operations earlier, rather than waiting for the customers to pay their dues.
How does it work?
You share the details of the invoice which you create to bill your customer against goods or services, with the lender who gives you a certain percentage of the invoice amount within a couple of days.
The percentage depends upon the lender’s risk evaluation criteria and therefore might vary with different lenders. The remaining debt from your customer will be paid back to you with a little service fee cut, which the lender takes as his fee.
Who can benefit from an Invoice Finance?
Invoice financing can benefit small, large and seasonal businesses alike. Small businesses face money crunch due to late payments by clients or customers and invoice financing can bail them out of such tricky situations and ensure they get paid on time. Large businesses use invoice financing as a cash flow tool to remain unaffected by late payments and ensure smooth operations. Though cash flow is important for all kinds of businesses, it is particularly true for seasonal businesses wherein invoice financing can help their payments flowing even during seasonal lulls.
The benefits and drawbacks of Invoice Financing
Invoice financing comes with various advantages such as confidentiality, flexibility, speed, and ease of use.
However, the two major disadvantages of invoice financing are the size of financing limited to the amount of invoice and the client’s inability to pay. Unlike other types of loans, invoice financing can let you borrow only up to the value of your invoices. And if your clients fail to make the payment or delay the payment, it could affect your credit score.
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