25% of SMEs in Saudi Arabia are suffering from cash flow issues.
Invoice Financing is one of the most popular financing options for growing businesses because of the
compelling benefits of quick funding, improved cash flow, low cost, simpler process, and flexibility. Since the
success of any business depends on its steadiness of finances, the businesses require to find out the most
efficient and cost-effective sources of finance. In this case, unlike other financing sources, invoice financing adds
value to the company by enabling it to monetize outstanding accounts receivables and to raise money when
needed before invoices are collected.
Along with invoice financing, some other popular and useful financing sources are working capital financing,
letter of credit financing, and Overdraft. However, invoice financing is quite different from the other financing
sources based on its ability to raise funds quickly without complexity.
Differences between invoice financing and other financing options:
financing options #1
Invoice Financing vs Working Capital Financing:
Working capital is the difference between the company’s current assets and current liabilities. Working capital is
used to finance the day to day business operating costs. Working capital financing refers to the process of
borrowing money to fund the operating costs of the business. Thus, the funds borrowed in working capital
financing is used only for covering short-term operational requirements, not to finance long-term assets.
However, the working capital financing process is more lengthy and slower than invoice financing. Unlike invoice
financing, working capital financing requires long-term asset collateral and the business has to pay higher
interest rates on working capital loans than the interests paid on invoice financing. On the other hand, by using
invoice financing, the business can acquire funding in the shortest time whenever needed at lowest cost on
annually charged interest rates and best convenience.
financing options #2
Invoice Financing vs Letter of Credit Financing
A letter of credit is the assurance of repayment on accounts payable given by the buyer to the seller through
third-party guarantors, such as a bank. Letter of credit a source of financing for the seller company. The holder
of the letter of credit can factor it through a bank before the initial buyer repays the outstanding accounts
payable and collects funds upfront from the factoring bank to meet the short-term financing requirements.
However, the letter of credit financing takes more time to collect funds than invoice financing and requires
more documents and collateral. In this case, the invoice financing is simpler and faster to raise funds for sudden
business needs.
financing options #3
Invoice Financing vs Over draft
In the overdraft facility, the bank allows the company to lend money up to a limited amount against the current
account of the company associated with the bank. Though overdraft is the fastest method of collecting
short-term financing, it is limited to a certain amount and the company has to pay interest on the borrowed
amount which makes it less attractive than invoice financing.Unlike the Overdraft , invoice financing is not
limited to approved facility limit prior to financing.
The usefulness of invoice finance option in improving the cash flow
The invoice financing fulfills the funding gap during the period between the time of products sold on the account and the time of collecting payments from account receivables. It takes a long time to collect the outstanding payments from the customers, however, in this period, the company may require funding for operating expenses such as payments to suppliers, wages to the labor, etc. In this, invoice financing enables the company to raise money by selling part of the invoices or to lend against the invoices to meet its expenses immediately. For example, a company with $10,000 outstanding receivable which the customer will repay after 30 days, can collect 70% of the invoice ($7,000) by selling the part of the invoice or lending money against the invoice. In this way, the business can increase its cash inflow immediately and meet its urgent operating costs by collecting money before invoices are paid. Thus, by using invoice financing, the company with outstanding invoices can increase its cash inflow whenever required.
The main advantage of invoice financing is that it makes the company able to release funds tied up as accounts
receivables and make improvements in business cash flow. By using the funding from the invoice financing
system, the business can meet its short-term obligations and capitalize on new growth opportunities by
capturing the window of opportunity. Business growth depends largely on steady cash inflow. Invoice financing
can supply funding quickly when needed and thus, helps the company to focus on customers rather than the
collection of invoice payments to cover business expenses. Therefore, invoice financing speeds up the slow
payments of invoices by acquiring funding before the collection of invoice payments which increases cash inflow.