Invoice finance is used by lots of businesses to fast track the money they’re owed, when they need it. But what is it, how does it work, when should businesses use it, and what other options are available? In this article we’ll break this all down and help you understand how to make the best decision for your business.

What is Invoice Financing?

Invoice finance is a way of borrowing money against unpaid but already issued invoices. Essentially, it brings the cash you’re owed forward by trading an invoice for a percentage of its cash value. 

This type of finance uses invoices as a way for businesses to unlock cash tied up invoices and therefore speed up cash flow. This is done by selling their invoices to a third party who will advance some of the funds the invoice is worth up front, in exchange for a percentage of the invoice value

How does Invoice Financing work?

1. As a merchant you complete work or sell products to your buyer, and send them an invoice.
   
   
2. The merchant uploads the invoice to the invoice financing facility – which is then checked for legitimacy.
   
   
3. The invoice financing facility will advance you a percentage of the face value of that invoice – typically 90%.
   
   
4. Your buyer pays their invoice. Payment is made to  a trust account provided by the invoice finance facility.
   
   
5. The invoice financing facility will pay the merchant the remaining balance of the face value of the invoice, minus any fees charged.

Turn unpaid invoices into instant capital with Kriya - Book a demo today

When would you need to use Invoice Financing?

To boost cash flow

A huge frustration for many businesses is knowing that they’re owed money for completed work, but having to wait to actually get their hands on it. Sometimes it can take 30, 60 or even 90 days for clients to pay up.

But your invoices are an asset. They represent money coming into your business and could hold the key to unlocking your cash flow – especially when you can tap into them on your own terms. Invoice finance allows you to do just that. It offers you an advance against your outstanding invoices that you’ve issued for completed work. You get up to 90% of the cash you’re owed upfront, and pay a fee to the finance provider.

Examples of cash flow issues that can be solved with Invoice Finance:

• Staff wages – If you need a short term cash injection to meet payroll, invoice financing can be a great option
  
  
• One-off and unexpected costs – a surprise bill doesn’t have to be a disaster if you have a facility in place to dip into and cover the cost

To support growth

Invoice financing can also be used as a tool for driving growth: In many cases merchants have established terms with clients where payments are received over longer time periods, and the merchant isn’t inclined to re-negotiate terms.

Equally, merchants looking to supply much bigger businesses (such as national retailers and distributors), often find that payment terms are dictated by their larger customers. 

In these scenarios, invoice financing provides essential financial infrastructure  to receive the cash quicker in order to source inventory to fulfil orders and cover overheads. It’s often far less risky than taking on a loan, finding new investors or using other assets, as the liquidity is tied to existing sales orders

Examples of how Invoice Finance can help your business grow:

• Offering better credit terms for your customers – if you know that you can access cash instantly, you can offer your customers longer payment terms to help them manage their own cash flow and incentivise them to use you
  
  
• Winning bigger clients that enforce long payment terms - take on bigger contracts from clients that require longer terms, safe in the knowledge that those invoices can be financed
  
  
• Managing seasonal demand – use the cash to purchase extra stock to get ready for a period of high demand (or manage the quieter times)
  
  
• Taking on new business – don’t be held back by a lack of resources. The right facility will let you take on a new contract and cover the upfront costs
  
  
• Negotiating better rates with your own suppliers – the extra financial firepower that invoice finance offers you means you can negotiate purchases based on scale and payment terms

Invoice financing through Kriya

At Kriya we make it incredibly easy to finance your invoices and unlock working capital immediately.

• Get up to 90% of your invoice funded within 24 hours
• No hidden fees or contracts - you only pay when you finance an invoice
• Flexible financing: Pick and choose the specific invoices you want to finance 
• Go beyond your business credit limit
• Maintain customer relationships: Discreet payment collection
• Global financing: We support over 45+ countries and the major global currencies
• Hassle free experience: easy to use digital interface
• Help in real-time: personal customer support
  

We make it simple with a pay-as-you-go approach – pick and choose which invoices to finance as and when you need to access the cash. It’s a super flexible option that’s great for one-off or seasonal needs.

Invoice Financing vs Invoice Factoring

It’s easy to confuse invoice finance with invoice factoring. They’re not exactly worlds apart but there are a few crucial differences. These are mainly in terms of how much control you have over your customer relationships.

With invoice factoring, the merchant ‘sells’ outstanding invoices to a ‘factoring company’ or lender. Factoring companies will then take control in managing your buyers (sometimes called debtors) (including chasing late payments), and can even credit check potential customers. 

This level of involvement and direct communication means your customers will be aware you’re using this form of finance. 

Whereas, with invoice financing the merchant is effectively using the invoice as collateral for a loan from an invoice financing company. The merchant continues to be responsible for collecting payment from the buyer, and is able to maintain that relationship. The buyers are typically unaware that their invoices are financed. With invoice factoring, the buyer is aware.

Invoice factoring usually comes with a higher cost compared with invoice financing.

Alternatives to Invoice Financing

When considering whether to use invoice financing, businesses will want to consider the alternative options. Depending on the specific circumstances there may be a better approach. You will want to conduct thorough research into the most appropriate option for your business.

Invoice Factoring

Invoice factoring is commonly confused with invoice financing but - as we’ve covered above - has some significant differences. Merchants ‘sell’ their invoices and receive a percentage of the value earlier, but don’t retain control of the buyer relationship, and pass the responsibility for payment collection to a third party, factoring company. 

Factoring may be more appropriate for merchants that don’t have the ability to collect payments themselves, or are not concerned with maintaining the relationship with a buyer.

PayLater

With PayLater, merchants can offer buyers flexible payment terms - such as pay in 30 or 60 days, or pay in 3 instalments - while receiving the funds upfront from a PayLater provider. Merchant’s can offer PayLater options via invoice email, checkout, in-person, telephone, or offline in a seamless payment flow.

PayLater would be more appropriate for merchants that; would prefer to offer flexible payment terms to buyers up front, trade both online and offline, are looking to provide a frictionless payment experience.

This offers all the same benefits of invoice finance, with the flexibility of digital payments.

Learn more about PayLater

Bank Loans

The traditional way to access additional funding for many businesses remains taking out a bank loan. The merchant borrows a defined loan amount and repays it back over a specified time period with interest. 

Bank loans may be more appropriate for longer term investments when a merchant needs significant capital to fund large-scale projects.

Read our article on invoice financing vs bank loans

Purchase Order Financing

Another option for merchants looking to raise funds before invoices are paid is ‘purchase order financing’. Merchants are able to receive funding from lenders based on purchase orders received from buyers. Once the invoice is paid, the lender deducts their fees and sends the remaining balance to the merchant.

Purchase order financing may be a more viable option for businesses with large orders but insufficient cash flow to fulfil them.

Turn unpaid invoice into instant capital.

Invoice finance is a fast and reliable way to manage your working capital by advancing the money your customers already owe you. You won’t be giving away any equity in your business and funds are only secured against your invoices.

With Kriya, there’s no waiting around for invoices to be paid - you could access funds within 24 hours. 

You’re in full control: There are a range of flexible options available, and you’ll maintain control of the payment collection & the buyer relationship.

Learn more about our Invoice Financing options or book a demo today.

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