Invoice Financing

Invoice financing is a financial solution that allows businesses to access immediate cash by using their outstanding invoices as collateral. Instead of waiting for customers to pay their invoices, companies can sell their receivables to a third-party financier, typically at a discount, or borrow against them through a line of credit. This provides businesses with quick liquidity to manage cash flow, cover operational expenses, and seize growth opportunities without taking on traditional debt. Invoice financing is particularly beneficial for small and medium-sized enterprises (SMEs) that may experience cash flow gaps due to delayed customer payments

Free up capital for your operations, monetize your invoices for cashflow and optimize your business

A sample use case for invoice financing

The Invoice Financing Process

Issuing the Invoice: After fulfilling the contract, Zippy Apparel issues an invoice for $200,000 to the retail chain.
Approaching a Lender: To bridge the cash flow gap, Zippy Apparel approaches an invoice financing company. The lender evaluates the invoice and agrees to provide an advance of 80% of the invoice value.
Receiving the Advance: The lender wires $160,000 (80% of $200,000) to Zippy Apparel within 48 hours of the invoice submission. This amount is crucial for maintaining operations and covering immediate expenses.
Payment Terms: The lender charges a processing fee of 2% ($3,200) and an interest rate of 1% per week on the advanced amount until the invoice is paid. Since the retailer pays the invoice after 21 days, Zippy Apparel incurs an interest charge of 3% on $160,000, totaling $4,800.
Final Settlement: Once the retailer pays the full invoice amount directly to the lender after 30 days, the lender deducts its fees ($3,200) and interest ($4,800), totaling $8,000. Zippy Apparel receives the remaining balance of $192,000 from the lender.

Benefits Realized

Immediate Cash Flow: By utilizing invoice financing, Zippy Apparel was able to access funds quickly without waiting for customer payment.
Operational Continuity: The advance allowed Zippy Apparel to maintain its operations smoothly and invest in new inventory without disruption.
Preservation of Customer Relationships: The retailer remained unaware of the financing arrangement, allowing Zippy Apparel to maintain its relationship with them without complications.

Conclusion

This example illustrates how invoice financing can be a vital tool for businesses facing cash flow challenges due to delayed payments from customers. By converting unpaid invoices into immediate cash, companies like Zippy Apparel can ensure operational continuity and support growth initiatives without incurring significant debt or sacrificing customer relationships.