June 13, 2024
Invoice Financing

Invoice Financing

For all businesses, balancing credit sales and liquidity is an unavoidable paradox. Small businesses, in particular, may find the task difficult. To ensure the availability of sufficient working capital for the firm’s day-to-day operations, cash inflows, and outflows must be carefully managed. Invoice finance is a short-term borrowing facility that can help you get out of this jam.

A Quick Overview of Invoice Finance

Invoice finance, also known as accounts receivable finance, makes future cash flows available for use in the present. Firms use this facility to borrow money against approved but unpaid invoices in order to meet their short-term liquidity requirements. After deducting the margin and any applicable charges, lenders pay the invoice value in full. When the payments on these invoices are received, the borrower repays the advance amount plus any interest and charges. This article discusses seven major advantages of invoice financing for small businesses.

1. Prompt Liquidity Crunch Solution 

Invoice financing is a quick, no-hassle way to raise funds against accounts receivable. The entire process is simple and quick, taking only 24-72 hours from the time of application to the time of fund disbursement. Because no collateral is required, many procedural formalities are skipped, resulting in the credit facility being processed quickly. Furthermore, when the invoices are settled, the credit is fully serviced as bullet payments. This eliminates the hassle of repaying loans over longer periods of time.

2. There is no Collateral and it is Easily Accessible.

Traditional business financing is typically asset-based, with collateral required for loan approval. Furthermore, lenders frequently require financial statements from previous years for credit evaluation purposes. Small businesses and new firms that cannot meet these draconian requirements may borrow from private lenders to meet their funding needs, putting them in debt. Invoice finance, on the other hand, provides cash advances to businesses based solely on unpaid invoices. This is especially helpful for new businesses that are unable to obtain credit because they lack the necessary financial statements, such as the previous three years’ balance sheets or two years’ GST returns, among other things.

3. Improved Credit Management and Control

Invoice financing provides businesses with greater flexibility and credit control than any other credit option. Firms can borrow as much money as they need and as frequently as they need, and they can finance specific customer accounts or invoices. Firms can also choose how much control they want over their payable collection process based on the type of invoice financing they use. This brings us to an important aspect of receivable financing: invoice factoring and invoice discounting. Firms that use invoice factoring sell their unpaid invoices to lenders, who then collect the debt. The lender advances the borrower 80% to 85% of the invoice value. The receivables are paid to the lender, relieving the invoice owners of the burden of collection. After receiving the full invoice value, the lending firm will transfer any remaining balance to the borrower after deducting interest and charges. Factoring reduces the risk of bad debts and late payments by involving the lender in the collection process. They can even run credit checks on your buyer/client to determine creditworthiness. When a company chooses invoice discounting, it retains complete control over its receivable collection process. The company receives the invoice payment on time and settles the outstanding liability with its lender, including processing fees and interest. Borrowing firms can receive up to 90% of the invoice value as a loan by using invoice discounting.

4. Better Control of Cash Flow

Credit sales typically tie up funds for 30 to 90 days, depending on the buyer’s credit period. Invoice financing bridges the gap between payables and receivables. The funds thus made available are used to pay off short-term liabilities such as staff salaries, supplier payments, and so on. It is also reinvested in the company to help it grow and expand. Small businesses frequently operate on razor-thin margins. As a result, they are unable to offer their buyers longer credit terms. Payment of current liabilities on time allows such companies to extend credit terms to their loyal customers. Furthermore, timely debt service improves a company’s creditworthiness.

5. Greater Emphasis on Core Business

Receivables management consumes a significant amount of manpower, money, time, and effort. Invoice financing allows businesses to focus more on their core activities by converting credit to cash quickly. Instead of chasing down debtors, businesses can use their resources to improve sales or implement organizational best practices.

6. Higher Margins and Lower Costs when Compared to Loans and Overdrafts

In a cash-strapped trade, every penny counts. To overcome the cash crunch, businesses will seek the maximum borrowable limit. Banks and other lending institutions frequently keep a margin of 20% to 25% on loans and overdrafts. Invoice financing provides higher margins, i.e., 80% to 90% of invoice value as advances, making it a better deal for businesses. Loans and overdrafts are also subject to quarterly service charges. The service charge or fee (a percentage of the borrowed amount) must be paid only once in invoice financing. With interest rates in the double digits, servicing business loans will eat into profits over time. Invoice financing is a low-cost alternative to costly business loans.

7. Obtaining Working Capital While Maintaining Balance Sheet Strength

This may sound like chartered accountant jargon, but it neatly summarises everything we’ve discussed here. Finally, a balance sheet serves as a business’s health card. A business should never have too many short-term debts to cover a high level of short-term receivables. Invoice financing allows locked funds to be released without significantly disrupting the asset-liability balance.

A Quick Glance At Pakistan Invoice Financing Scenario

Pakistan’s invoice financing market has seen significant growth in recent years, driven by a growing demand from small and medium-sized enterprises (SMEs) for working capital. Invoice financing is a form of short-term borrowing that allows businesses to borrow against their outstanding invoices. In Pakistan, this type of financing is still in its early stages, but it has great potential to help SMEs overcome their cash flow problems and access the financing they need to grow. The government and other stakeholders are taking steps to create a more conducive environment for invoice financing, including regulatory changes and the establishment of credit bureaus. As a result, the future looks promising for the growth of invoice financing in Pakistan.

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