If you own a business, you will understand the problems of irregular cash flows combined with limited cash reserves. With invoice financing, a company/brand can use invoices to get a loan from a financing company. As a result, there has been a surge in popularity as a finance solution for businesses of all sizes, particularly those in the small to medium range.
Invoice financing operates similarly to a traditional secured loan, as it has set payment terms (short-term) and accumulates interest charges on outstanding balances. Still, it uses one or multiple invoices as security for the loan.
Certain businesses receive short-term funding from financial institutions that offer essential liquidity until they have a more substantial cash reserve.
Invoice financing is used regularly in a wide range of sectors and industries such as construction, retail, transportation, and consumer goods, and this method is most beneficial for B2B sellers who have established customers with a proven record of prompt payments, and this means that if you primarily sell to individual consumers, it is not suitable for you.
There are several reasons why businesses may need invoice financing, and one common reason is to improve cash flow. For example, your company can cover immediate expenses, invest in new projects, or expand your operations by accessing the funds.
Who is invoice financing for?
Invoice financing benefits small businesses needing the capital or credit history to access traditional bank loans. It can provide access to funds to cover day-to-day expenses or invest in growth opportunities. Invoice financing is becoming increasingly popular among small and medium-sized businesses and you can opt for this service as a small business owner.
To illustrate this point, consider Mr. John, a businessman who sells goods to wholesalers and retailers on credit. This means that his buyers do not make immediate payments but instead, receive invoices with the total amount due and the due date. If Nr John were to continue operating this way, it could put a strain on his cash flow and jeopardize his ability to sustain the business. However, through the use of invoice financing, he can obtain the necessary funds to continue operating his business.
Criteria for obtaining invoice financing
There are several factors to be considered before obtaining invoice financing and some of them include:
- Amount required by your business
- your business financial turnover over a period of time
- customer base of your business
- total outstanding amount of your unpaid invoices
- the visibility of your business.
TYPES OF INVOICE FINANCING
1. Invoice discounting
This involves borrowing against the value of outstanding invoices. The business retains control over its account receivable. It is responsible for collecting payments from its customers. Still, the lender advances a portion of the invoice value to the company and repays the loan with interest when the invoices get paid.
This type of invoice financing is a short-term arrangement in which a business sells a single invoice to a factoring company for a one-time fee.
3. Selective factoring
This involves only selling specific invoices to a factoring company rather than all of a business’s accounts receivable.
4. Reverse factoring
This involves a supplier selling its invoices to a financial institution and using the proceeds to pay its suppliers. The financial institution then collects payment from the buyer.
What type of invoice financing does Earnipay provide?
Earnipay provides two types of invoice financing:
1. Receivables Financing
Earnipay’s Receivables Financing provides businesses with the flexibility of short-term or long-term funding by using their outstanding invoices as collateral. After rendering services to customers, businesses can receive up to 80% of the invoice value from Earnipay, which allows them to carry out necessary tasks before receiving payment from their customers. This helps businesses maintain their cash flow and ensures that they can operate smoothly without worrying about waiting for customer payments.
2. Payables or Purchase Order Financing
With this type of financing, businesses can fund their purchase orders and pay their suppliers on time. Earnipay will fund up to 80% of your purchase order value, allowing you to receive the materials from your suppliers.
At Earnipay, we will take care of the administrative tasks related to invoicing and payment collection on your behalf.
How is this different from traditional financial options?
Some benefits of invoice financing over other traditional financing options include;
This option allows companies to quickly access capital by converting outstanding invoices to cash, and the process is faster than traditional methods like bank loans.
2. Approval process
Our invoice factoring process requires less documentation and has a faster approval process when compared to traditional methods as this doesn’t need lengthy application and underwriting processes.
Unlike traditional financing options, Earnipay doesn’t require collateral.
Our product features a swift decision-making process and easy approval, which can help your business avoid payment delays and keep your operations running smoothly. If you’re about our offerings, book a demo today.