Invoice financing has been around for a long time. Also called invoice discounting or factoring, invoice financing works on a simple principle but has its advantages nonetheless. During times of a cash crunch or to meet urgent investment requirements, it can often be the best possible option.
What’s Invoice Financing?
Invoice financing, as the name suggests, is financing on the basis of pending invoices. So, if a company has Rs. 10 lakhs worth of unpaid invoices then it can use them to receive a portion of that amount from a provider.
These invoices can be utilised as security by the lender, and they can disburse 70% or 80%, etc. of the total unpaid amount to the company. When the concerned customers pay off these invoices, the company can repay the amount to the lender.
Usually, the company has to pay a certain fee for this service which could either be a flat amount or a varying amount based on an interest rate.
Invoice financing is a good funding option. However, it has its share of misconceptions. On that note, the following are four biggest myths of invoice financing:
Myth #1: It’s Expensive
Invoice financing can be expensive- that’s true. However, in most cases, it is actually quite affordable. Since the lender gets security in the form of unpaid invoices, which are accounts receivable, the risk they have to take is not that high. If a company fails to repay the debt, then they can simply use the invoices as collateral.
Most invoice financiers charge a small fee for the service, especially if the company is linked to a long-term contract. So, in the big picture, the cost of service is relatively lower than other options such as loans.
Myth #2: It can Leave a Bad Impression on Customers/Clients
Invoice financing may be availed on a disclosed or undisclosed basis. In the latter, the invoice payments are made to the actual company, and the customers don’t get to know about the involvement of a third party. However, in the former, the customers know about the third-party and they have to make payments to a different account that belongs to the lender. So, by choosing the first option you can prevent your customers from finding about the arrangement.
Myth #3: Invoice Financing is for Struggling Businesses
Invoice financing is often put in bad light. However, the truth is that not only it has numerous advantages it’s becoming one of the most popular forms of funding today.
Invoice financing allows you to meet your short-term liquidity requirements at a small price. So, you can pay the salaries of your staff, buy new equipment, or even plug the leaks in the cash flow with the quick funding.
Myth #4: Your Business is Locked in a Long-Term Contract
A financial institution, especially an NBFC, would want a client with long-term financing needs for sustained revenue. This is the reason why many invoice discounting service providers ask their customers to sign a 6-month or 12-month term contract. However, some lenders are more flexible and offer short term contracts up to a month or two as well.
Despite all the delusions regarding Invoice Financing, it still holds up to be one of the easiest and simplest funding option a business can go for. The key is to find a provider that offers lower fees and high flexibility