Cash is king in business, that is why working capital is one of the most trending subjects right now. They are multiple ways for companies to finance their needs from long-term debt, revenue-based financing, or short terms loans, the financial market offers various instruments for businesses to find the right financing tools.
One of the most common for SMEs is invoice financing which is very common around the world.
What is invoice financing?
Invoice financing is a short-term loan that a financial institution gives to a business based on a face value of an invoice. It can be used on the sale side based on the value of the company clients’ invoices which is called factoring or on the buying side to finance their supply needs
Invoice financing or Factoring on the client-side:
Invoice financing helps businesses improve cash flow, pay employees and suppliers, and reinvest in operations and growth earlier than they could if they had to wait until their customers paid their balances in full. Businesses pay a percentage of the invoice amount to the lender as a fee for borrowing the money.
Invoice financing can solve problems associated with customers taking a long time to pay as well as difficulties obtaining other types of business credit.
Consider an exporting company that is using factoring to offset the credit risk on their sales :
- The company ships the goods to their client and invoice them.
- She sends the invoice details to the invoice financing provider- the factor.
- The company received a percentage of the face value of the invoice depending upon the lender’s own risk criteria.
- The company collects the payment from their client.
- She pays back the factor of the amount lent and receives the portion of the invoice that wasn’t part of the lending deal. (less a service fee)
This financing tool is often used by companies as a liquidity tool to maintain their treasury and offset potential cashflow issues due to late client payments. It is a way of hedging against potential delays on their clients’ repayment.
Invoice financing on the supply side :
On the supply side invoice financing is used as a mechanism to finance operating needs and operations. Based on an invoice due to a supplier, a financial institution will lend the money to a business to pay the amount. The amount lent will be paid back to the financial institution on pre-agreed terms and time frame. This kind of financial tool is a means for companies to finance their treasury and cashflows. A good example of an invoice financing tool for importers is the letter of credit, which is often used for treasury reasons.
Consider a company, that is importing goods they are looking to improve their cashflow so they decide to use the following financing tool describe earlier :
- The company and her supplier negotiate the purchase order.
- The company goes to see their financial institution and agrees on the following terms. The financial institution will lend them money and the company will pay the loan back in 60 days.
- The company pays the supplier with the loan amount and the supplier sends the goods.
- The goods arrive 30 days later, the company sells the goods to their clients and gets pays.
- On the 60th day, the company pays back the financial institution with small interest.
Using this mechanism, the company didn’t have to engage funds until the 60th day. If the sales cycle allows it, the company pays back the financial institution using the amount she recovered from selling the goods. The cash flow will be impacted positively by this operation.
At Tulyp, we offer these invoice financing tools for our imports & exports clients. As a FinTech specialized in Trade Finance, the Tulyp solution supports international trade actors on their payment guarantees, financing, and liquidity issues. If you have any questions you can contact us, one of our experts will contact you within 24 hours.