Invoice Finance is a method by which a Business can avail of credit. An enterprises pledges its future receivables for short term credit which can be repaid on the eventual collection.

The concept involves the availing of credit based on the invoicing done by the enterprise in the regular course of business. The financer will loan to the enterprise an amount equivalent to the invoice value and shall charge a commission or interest for its services. Every Financer offering Invoice Finance has its own parameters in offering invoice financing to enterprises but overall the most important requirement that is required is that the service/sale be completed and duly acknowledged by the customer. If the function meets all the requirements to be considered as a valid sale, then it is very unlikely that an enterprise shall not be able to find a financer.

Types of Invoice Financing

Invoice Financing are primarily of two types

1 Invoice/Bill Discounting

2 Factoring

Invoice or Bill Discounting mainly involves availing credit from a financer against the total invoice value.

The financer shall charges a discounting charge/commission or interest and pay the discounter the value of the invoice. The repayment of the loan shall be done at the due date of the invoice wherein the discounter shall hand over the full value of the invoice over to the discounter on settlement of the loan. Invoice Discounting is an effective method of short term financing as it allows the enterprise to avail credit against the sale/service effected. Invoice Finance two parties, the borrower and the lender. The debtor is not involved in the discounting transaction as in case of factoring.

Factoring works very much the same way as invoice discounting except that the factor or the lender shall take charge of the process of collection. The loan seeker shall hand over the entire responsibility and rights of the invoice over to the factor and shall be relieved of the process of collection and repayment. The factor shall collect the amount due from the debtor and shall settle the loan. Factoring can at times be much more than a simple financing method as it also involves the collection process and the enterprise that avails it can save administration and other cost and can concentrate on the other aspects of the enterprise. There are enterprises that do not involve itself in the collection process but factor it and have functioned with very few problem. Factoring unlike invoice discounting involves the borrower, the lender and in addition it also involves the debtor. The relation debtor is with the seller for the purpose of purchase and with the factor for the purpose of payment.

The Advantages of Invoice Financing

Better cash flow:- Invoice financing enables an enterprise to receive the funds against the invoice notwithstanding the credit period. This serves in the very same method as early collection of receivables and helps in the improvement of cash flow.

Cost saving due to factoring:- On factoring of receivables, an enterprises saves by way of administrative and staffing cost and these saving go a long way in reducing the cost of factoring

Independence to concentrate on other areas:- With factoring, the enterprise can direct its energies in other areas to improve the productivity of the business.

Uses of Invoice Financing

On the whole, Invoice Finance is a feasible method for availing of credit, which can be used effectively by both small and large enterprises. Invoice Discounting is an effective way of availing short-term credit while factoring is an effective cost saver and in certain cases a good long term solution for any receivable problems. However, an enterprise should weigh it decision to go for either of these methods. Invoice financing opens the enterprise to its financers especially factoring where the factor becomes a part of the enterprises and directly deals with the customers. These may lead to frictions, which might not be good for the enterprise in the long run.

An enterprise intending to go for invoice financing must clearly plan out its requirements and should then go for a scheme that is better for it, taking into account the structure of its enterprise. Small and medium enterprises will be more benefited by factoring due the saving of cost and the relaxed cash flows that it will enjoy. Also, factors are professional organizations that are better informed as to how the collections should be undertaken. This professional guidance will help an organization plan its sales. Also, the factors are well-connected organizations that are better equipped to determine the credit worthiness of an small or medium enterprise. However, there can be problems when the factor due to its interest in the enterprise may end up dictating to the enterprise as to what the enterprise should or should not do and to whom the enterprise can or cannot sell. An Enterprise should take adequate care at the time of entering into a factoring agreement as to the rights, obligations and powers of the factor so that unnecessary problems do not occur. A small or medium enterprise can avail invoice discounting as an alternative to factoring. Invoice discounting does not contain the negative features of factoring. As the enterprise does not hand over any of the rights or obligations relating to the receivables but only avails credit against it. Therefore, it acts solely as a lending agreement with no interference on the operations. These are precisely the features that make it a better option for larger enterprises. Large Enterprises have the resources and the manpower to manage its own collections. Therefore, such enterprises shall benefit from invoice discounting which shall allow large-scale enterprises to avail of short-term credit against the sales or services affected by them. Factoring is done by certain large enterprises, but these are done only to a limited capacity. For example, a company with say $ 10 million worth of turnover with 20 geographical branches may decide to go for factoring of one of its branches to the extent to say $ 700,000. Thus, both small and large scale enterprises have uses for invoice financing.