Invoice receivables also referred to as accounts receivables, are a legally enforceable claim for payment by a business for goods supplied and/or services provided, for which they are awaiting payment. Usually these are in the form of invoices raised by a business and sent to the customer for payment, within an agreed time frame. Invoice Finance, usually calculated based on invoice receivables, is a financial product that allows businesses to unlock the cash they have tied up in unpaid invoices. Rather than being deemed typical lending, it is seen as more of an asset purchase as a business can raise money against its debtors.
There are two types of invoice finance: Invoice discounting and factoring.
Invoice discounting is essentially an asset-based financial product that allows businesses to access money tied up in outstanding invoices by selling them for a payment equivalent. Invoice finance is a type of asset-based lending – the book debt (also known as the sales ledger) is the asset against which the funding is lent.
It is the alternative solution to business finance that SME’s are using to help manage cash flow. For businesses, especially SME’s, this is a lifeline that is often needed. It enables businesses to access funds immediately after raising an invoice, rather than having to wait for their customers to pay.
Most businesses tend to prefer this option as the invoice finance company does not take on the responsibility of handling the sales ledger management, which includes the collection of invoices and can jeopardise relationships with customers if outsourced.
Secondly, there is invoice factoring. This is similar to invoice discounting, however the difference between the two is that discounting means a business handles their own sales ledger management, credit control and collection of invoices.Back