What exactly is invoice financing?
It is the sale of a company's sales ledger for cash, providing the company with an ongoing source of cash as invoices are issued to customers. The company may keep the cash collection or transfer it, along with the associated credit risk, to the funder.
Some traditional IF facilities may levy a variety of fees and charges, as well as require security and a commitment from the company to sell its entire sales ledger to the finance company.
Some businesses provide a refreshing financial alternative, offering to buy a single invoice and charging as little as one fee, and generally providing a more flexible funding option.
What exactly is single invoice financing?
It is the purchase of one invoice for cash from a company, as the name implies. Because the company does not need to sell any additional invoices, single invoice finance can be used by businesses to raise cash as needed. Furthermore, they may not be required to provide security such as a debenture or a personal guarantee.
Single or multiple IF are effective cash management tools because they liquidate illiquid assets, converting debtors into cash. The proceeds can be reinvested in profitable projects or used to repay high-interest debt.
Some borrowers may argue that the cost of invoice finance is higher on an annualized basis than the cost of a conventional loan. Because the two financing instruments operate differently, comparing them is like comparing apples to oranges. A loan is a continuous source of finance, whereas single invoice finance is a discrete source of finance, providing financing for up to 90 days or less. Annualisation of the cost of invoice finance is thus inconsistent with its application.
Though the interest rate on a loan may appear to be attractive, the cost of arranging and administering it must also be considered, including arrangement, commitment, non-utilisation, and exit fees, as well as servicing charges and legal documentation costs. There may also be costs associated with pursuing and recovering bad debts or paying for credit protection. Invoice financing has its own set-up and administration fees, which may be higher or lower than those of a bank loan.
As a result, invoice financing is a credible alternative to a loan because:
It converts a company's debtors into cash, which can then be reinvested to generate a positive return for the company.
The company has the ability to transfer debtor credit risk.
It avoids a bank's limited credit capacity for a company and diversifies the company's funding sources, reducing its reliance on the banking sector.
Companies can use it to raise funds if necessary security is not required."""