One of the ways to raise funds is through invoice financing. It can be used to bridge the gap between raising the invoice and also getting paid—two things you want to enjoy when running a business. However, like any other type of financing, there are costs involved with invoice financing.
That being said, let us talk more about invoice financing and what there is to know about it:
What Exactly Is Invoice Financing?
Invoice financing is a type of financing where a company lends money to a company in the form of an invoice. The amount depends on the business' credit history, credit rating and how it conducts its operations. It is also based on factors such as how old the business is, the value of its properties and its history of paying obligations.
Basically, there is a middleman who buys the business' invoice then issues a promissory note for the same amount. The promissory note can be cashed by the middleman, who will pay the business back, plus a small amount of interest or discount.
For the business, these promissory notes are fully-collateralised, so they can be used as a long-term source of additional financing.
Types of Invoice Financing
There are two types of invoice financing: unsecured and secured. Unsecured invoice financing is one where the lender of the money (the middleman) is not secured by any collateral.
This means that the invoice is the only thing that secures the loan. However, there are several benefits to this form of financing.
The promissory note is short-term, usually with a maturity of less than one year. It is usually issued with a small amount of interest, which can be high if the business is new, but as it matures, the interest rate drops as well.
Secured invoice financing is one where the lender can secure his promissory note with collateral. The collateral can be the invoice.
A secured invoice financing will have a long-term maturity. This can range from 2 to 4 years, depending on the lender's sensibilities and the transaction's credibility.
What Costs are Involved with Invoice Financing?
There are several costs involved with invoice financing, just like with other forms of financing. These include development, documentation, origination, servicing, tracking and administration.
The development cost is the cost of the middleman to prepare and issue the promissory note.
The documentation cost is for the middleman to actually issue the promissory note.
The origination cost is for the middleman to assess the company's present credit status.
The servicing cost is for the middleman to follow up with the business' transactions to ensure that the transaction is valid and not just a fraudulently premeditated act.
The tracking cost is for the middleman to track the transactions to ensure that the invoice is being paid on a timely basis.
Finally, the administration cost is for the middleman to comply and file the necessary documents and reports.
Invoice financing is a form of short-term financing that you can use to help your company get on its feet financially. Although it has some costs, it is a good way to get additional funding for your business. However, selecting a company for invoice financing should not be taken lightly. Make sure that you do your research properly, so you will not be swindled later on!
The ECommerce Accountant offers business advisory services to help online stores and influencers grow their efforts online. If you are looking for an accountant for e-commerce businesses to help you raise funds, reach out to us today!