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A Guide to Understanding Invoice Financing

Invoice financing resource

What is Invoice Financing?

What is invoice financing? Invoice financing is a term used in business financing where an organization sells its invoices or accounts receivables to a financing organization for a specified percentage of the face value of the invoice. It is worth noting that customers buy goods on credit which may take much time to be paid and as a result may cause the organization to experience cash flow challenges. To avoid this situation, businesses decide to sell their accounts receivables to a third party organization that opts to receive the invoices and pays the amount within the shortest time possible while at the same time deducting an agreed percentage.

How Does Invoice Financing Work?

Many small business owners in South East Asia including experienced finance officers do not know how invoice financing works. However, it is crucial for you to understand that invoice financing follows particular criteria that one should comprehensively understand.

The first step of financing your invoices includes providing the goods and services that customers may require after which you are required to invoice them. The invoices are later sold to an invoice financing organization which pays the company the due amount, after deducting an agreed service fee. The company receiving the money will have its cash flows organised in such a way that it is liquid enough to meet its obligations as and when they fall due. The company will be able to pay its employees and suppliers within the stipulated duration hence helping it to maintain its operations rolling.

The financing organization will later collect the invoiced amount from the customer who had bought products or services on credit. In most of the times, financing organisations are required to have acceptable customer relationships and act with professionalism as they may damage the relationship between the business and its customers. Accounts receivables buying organisations have proved to be a lifeline to the companies that do not have enough finances such that they can be able to finance their activities while at the same time selling goods on credit.

Benefits of Invoice Financing

The primary benefit of selling your invoices is that your company will be paid for the goods and services rendered, hence improving your liquidity and the general welfare of the cash flow statement. This is an essential strategy for small organizations in South East Asia, which are required to keep operating without waiting for payments to be paid after extended periods, which sometimes go beyond 30, 60 or even 90 days.

The second benefit of selling accounts receivables to a financing organization is that it helps a small business to fund its growth without getting loans and other funding opportunities to propel the growth of the company. Using the assets that the company has at its disposal is a strategy that is recommended to chief finance officers as it helps the business to avoid the challenges and liabilities that comes with loans.

Lastly, you will need to choose your invoice financing organization after considering essential aspects such as their customer relations, percentage charged on the face value of the invoiced amount, and the time is taken to pay for the invoices.

Download our free invoice financing fact sheet here:
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Joseph Seah

Joseph Seah



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