Invoice financing (IF) is not considered a credible source of financing among some business owners due to its relatively high cost and onerous terms. Is this perception justified? I will argue that it is not with the introduction of single bill financing.
What is invoice financing?
It is the sale of a company’s sales ledger for cash, providing a continuous source of cash as the company issues invoices to customers. The company can retain the cash collection or transfer it and the associated credit risk to the financier.
Some conventional FI facilities may impose numerous types of fees and charges, and require certainty and a commitment on the part of the company to sell their entire sales book to the finance company.
Some companies offer a refreshing financing alternative, offering to buy a single invoice and charging only one fee, and generally offering a more flexible financing alternative.
What is financing with a single invoice?
As the name implies, it is the purchase of a cash invoice from a company. The business does not need to sell any more invoices, so businesses can use single-invoice financing to raise cash as needed. Also, they may not need to provide collateral, such as a bond or personal guarantee.
Single or multiple FIs are effective tools for cash management because they liquidate illiquid assets, that is, convert debtors into cash. The cash obtained can be reinvested by the company in profitable projects or used to pay off expensive debts.
Some borrowers might argue that, on an annualized basis, the cost of bill financing is high compared to a conventional loan. That comparison is like comparing apples to oranges because the two financial instruments work differently. A loan is an ongoing source of financing, while single invoice financing is discrete, providing financing for up to 90 days or less. Therefore, the annualization of the cost of invoice financing is not consistent with its use.
Although the interest rate on a loan may seem relatively attractive, you also need to consider the cost of arranging and administering it, such as setup, pledge, non-use, and exit fees, as well as service charges and fees. legal costs of documentation. There may also be costs to search for and recover bad debts, or to pay for credit protection. Invoice financing has its own setup and administration costs that can be higher or lower than a bank loan.
Therefore, invoice financing is a credible alternative to a loan because:
- converts a company’s debtors into cash that can then be reinvested to potentially generate a positive return for the company.
- the company can transfer the credit risk of the debtor.
- avoids exhausting the limited credit capacity of a bank for a company and
- diversifies the company’s sources of funds, thus reducing its dependence on the banking sector.
- businesses can use it to raise cash as needed
- security might not be necessary