For a newcomer, the FinTech industry can be mind-boggling, making your head spin as you try to comprehend many of its complicated concepts. Invoice financing falls under the umbrella of such hard-to-understand terminologies that are crucial to understanding the FinTech space and, if overlooked, can stifle your company's growth.
What is Invoice Financing?
Invoice financing allows companies to borrow money against sums owed to them by customers. With invoice financing, businesses may improve cash flow, pay employees and suppliers, reinvest in operations and grow faster than they could if they had to wait for their customers to pay their bills in full.
Construction, retail, logistics, printing and publishing, transportation, and consumer products are just a few of the sectors and companies that employ invoice financing on a regular basis.
Need of Invoice Financing
Businesses frequently sell goods or services on credit to large consumers, such as wholesalers or retailers. It means that the buyer is not required to pay for the purchased goods right away. An invoice with the total amount payable and the bill's due date is sent to the purchasing firm.
Offering credit to customers, on the other hand, locks up funds that could otherwise be used to develop or expand a company's activities.
Businesses may choose to opt for invoice financing to finance slow-paying accounts receivables (ARs) or fulfill short-term liquidity needs.
How does Invoice Financing work?
The following is a step-by-step explanation of how invoice financing works:
You provide the goods/services to your consumers and bill them right away.
You submit the invoice financing company the invoice details (the lender).
Within 48 hours, you'll get a portion of the invoice's face value (the percentage depending on the lender's risk requirements).
As is customary, you receive payment from your consumers.
When your clients pay you, you settle your account by repaying the lender and keeping the percentage of the invoice that wasn't covered by your invoice financing agreement, less a service fee.
Invoice Financing VS Invoice Factoring
If you're a small business owner who's worried about unpaid invoices, you're not alone. Over 60% of bills are paid late, with 20% being paid more than two weeks late. Late payments might leave you cash-strapped, prohibiting you from paying your staff, paying your rent, or taking advantage of critical business opportunities.
Both invoice finance and invoice factoring are effective strategies for dealing with delayed cash flow. However, when it comes to the structure of the financing and how payment is collected from the consumer, invoice finance and factoring differ significantly.
Invoice financing, also known as invoice discounting, is when you borrow money against your pending accounts receivables (ARs). In the form of a loan or line of credit, a lender pays you a part of your pending payments upfront—usually 80 percent to 90 percent. You'll have to repay the borrowed amount along with the service fee plus interest after your client pays the invoice. Your organization is still responsible for retrieving money owed to you by your consumers in this situation.
Example of Invoice Financing:
Assume you're ABC Wholesaler, a restaurant wholesaler. You send XYZ a $5,000 invoice for ingredients you sold her. The invoice's terms are NET 30, therefore XYZ has one month to pay. Meanwhile, you need money to pay your employees, so you look for an invoice financing firm to help you out. They pay you $4,000 in advance for 80% of the invoice.
You follow up with XYZ, and she sends you a $5,000 check within a month. You pocket $850 and send the rest of the $4,150 to the invoice financing firm. You will receive $4,850 in total, which is 97 percent of the invoice value. The invoice finance company receives $150 in fees.
Invoice factoring can be categorized as a special type of invoice financing. An invoice factor buys your unpaid invoices and collects them from your clients. The lender will pay you a portion of the total owing invoice amount upfront if you use invoice factoring. They'll then be responsible for collecting the total payment. Once they've gathered the full value, they'll advance you the difference, keeping a portion for themselves. In this instance, your clients will interact with the factoring business to make their payment, not you.
Example of Invoice Factoring:
Assume you're ABC Wholesaler again, and you've sent XYZ a $5,000 NET 30 invoice for an order of fresh products. You need money right away, so you contact an invoice factoring service. The factor buys your invoice and gives you $4,250 in cash to utilize for your business.
The factor then contacts XYZ to collect payment for the invoice. They pay on time and send their check to the factoring company directly. After deducting their 4% charge, the factor pays you $550. In sum, you will receive 96 percent of the invoice value, or $4,800. Fees for the factor are $200.
Invoice Financing in India
Invoice financing has grown in popularity in India in recent years as a result of factors such as rapid access to collateral-free funds and a simple application process. Invoice or bill finance, which accounts for 10% of overall credit from financial institutions, can help businesses bridge their working capital gaps.
KredX, Lendingkart, MYND FinTech, Tata Capital, and other invoice finance providers in India make the procedure easier. Furthermore, thanks to AI-based FinTech startups like SynergyLabs, small business owners now have easy access to global FinTech solutions and consultation.
Many small business owners are frustrated by the difficulties of managing current expenses, debt repayments, and other financial obligations.
In order to deal with this, start with the simplest and most effective ways for controlling your cash flow. You can, for example, make it easier for clients to pay by sending invoices early, offering early payment discounts, and using online accounting and payment systems. These strategies can be a good place to start. If your cash flow problem persists, you may want to consider invoice financing, factoring, or another type of business financing solution.
Visit synlabs.io if you need help navigating the FinTech market or need FinTech solutions for your startup.
SynergyLabs is a cutting-edge technology consulting organization specializing in the development of enterprise-grade solutions for fintech startups, including ready-to-deploy PODs. Founded in 2017, it is a well-funded startup that assists FinTech companies in speeding their growth by delivering robust and scalable solutions. It provides BFSI (Banking, Finance, and Insurance), logistics, retail, and telecommunications services.
If you're a FinTech startup or company looking to develop cutting-edge solutions, send us an email at email@example.com to learn more about what we can do for you.