Invoice Financing or Debtor Financing is a way for businesses to monetise their debts due from their customers. When goods and services are rendered by the business to the customer, there is a lag between the time the bills are generated and the services rendered and the period in which the bills are cleared by the customer. If the customer is a wholesale customer or is a customer with regular large orders, then the terms of payment can be flexible.
This, ties up your funds, in spite of helping the business by offering a better relationship with your customers. Remember, you have a business to run; funds or no funds; it has to be business as usual. There are regular working capital needs, like rent, salaries, and other related business expenses, that need to be met. Now, how does the business meet these floating expenses?
Therefore, it is to bridge this fund gap that business are availing Invoice Financing. As the name suggests, Invoice Financing is a form of short term borrowing availed by the business from a lender based on the strength of due invoices.
Types of Invoice Financing
Invoice Financing can be structured in a couple of ways. The most common way is via Invoice Factoring and Invoice Discounting. Essentially, the basic difference between the two is in term of who is going to be responsible for collection from the debtor. If it’s the lender, its termed as Invoice Factoring; if it’s the business, then it’s termed as Invoice Discounting.
Let’s see them separately with an example:
Suppose, Company X has Receivables due worth AUD 100,000 which are due over time. Under Invoice Factoring, Z will purchase those receivables from X. Z will, in turn, pay 75% to 80% of the due receivable value upfront to X and also take responsibility for collecting the remaining amount. Once the remaining amount has been collected, Z will release the leftover invoice value to X, keeping faith with the percent towards their services. The key point here is that the receivables are serviced by the lender or Z, in our case.
Continuing with above example-
Suppose AUD 100,000 is due. Under Invoice Discounting, X will sell those receivables to Z. Z will, in turn, pay up to 90% to 95% of the receivables’ value upfront to X, and the remaining amount is paid once the invoice becomes due and is collected from debtors. The key difference here is the Receivables are serviced by the business or X in our case. Again Z will charge some % as fee for services offered.
Key benefits of Invoice Finance-
- Faster access to cash- Business can monetise their receivables within 24-48 hrs on approved invoices. No need to wait for approval of business loans from banks.
- Better Cashflow & Working Capital Management- Funds unlocked from unpaid invoices can be used to support business operations or to fuel growth and expansion plans.
- Flexible Terms- No fixed repayment terms with the lender as the payments are made only when the same is received from the debtors.
- Reduced Operating Expenses- You can avail better deals and cash discounts with your suppliers by making early payments rather than waiting to recover your receivables.
- Customised Terms- The Financing terms are customised, taking into account the specific nature of the business, its seasonality, cyclicality, etc.
- Professional Underwriting- Factoring-companies can provide professional underwriting services to business, to underwrite existing customers or help them identify risky candidates that can potentially default on future payments.
- Professional Receivables Management- Factoring-companies are skilful in handling headaches related to invoice collection and can reduce overhead expenses related to the collection.
- Strong Balance sheet- Since Invoice Financing is not considered as a Loan, it does not add liabilities to your Balance Sheet.
- Source of revolving credit- Invoice Financing is a short-term business, and has control over how much funds they would like to access, and can access repeatedly as per their requirement.
- Extended line of Credit- Businesses can offer an extended line of credit to loyal customers without hurting their cashflows, thereby fueling business growth.
Read this blog: How to get your invoices paid faster?
Is invoice financing suitable for your company?
- If your answer is affirmative to the above question, then Invoice Financing can be an attractive source of financing for your business.
- If you are running a Partnership, a Family Trust, a Sole Proprietorship, Pvt. Ltd. company.
- Does Account Receivables account for a significant part of your business model?
- Do you constantly wrestle with cash flow shortage, and are looking to streamline your cash flow management?
- Do you need quick finance loan approval but are not looking for collateral-based financing?
Hubbe Invoice Financing
Hubbe understands the cash constraints faced by SME’s for growing their business. Given that SME’s are major contributors to Australian GDP, and create over 7 million jobs, it is necessary that these SME’s are connected to the right lending partners. Hubbe’s partnership with market leaders in Finance, Insurance, Merchant Solution, ensures that SME’s are able to connect to right solution partners so that they can channelise their energy in scaling up their business model rather than worrying about the cashflow problem. Hubbe’s Invoice Financing solution helps businesses through-
- Flexible and convenient access to funds.
- Monetise receivables to fuel your growth ambitions.
- Get customised product solution tailor-made to your business model.
- Flexible & revolving line of credit that mirrors your sales growth.
- Improve your cashflow by getting better terms of credit from your suppliers for early payments and supplier discounts.
Hubbe can be your trusted business partner in business finance and business solutions space. A partner that can help you grow your Business!!