When you’re worried about cash flow, waiting for payment from your customers can put additional stress on your business. But what if you had access to the money you were owed before the invoice was paid?
What is invoice financing?
Invoice finance gives businesses access to the value of invoices that have been issued to customers, but not yet paid. There are several types of invoice finance on the market – including invoice factoring and invoice discounting.
Invoice factoring
Invoice factoring is when your unpaid invoices are on-sold to a third party, which then takes responsibility for collecting the outstanding funds. You might choose to use invoice factoring if you want to outsource your debt collection, while obtaining immediate funding for the unpaid invoices. You’ll likely sacrifice a percentage of the invoice as payment to the factoring company. You’ll also lose control of the customer relationship at this point, with the third party chasing your customers to pay.
Invoice discounting
While invoice discounting is similar, you are still responsible for collecting the accounts receivables, while the lending institution provides funding based on the unpaid invoices you submit to them, less a lending fee. Many invoice discounters will require you submit your entire receivables ledger as collateral so they can assess the creditworthiness of your clients.