Invoice Finance : A great solution for the finance problem of a business unit

Sometimes small business units may face financial problem to meet the production cost for a service or an order of supply of its products, when the payment is to be done only after the customer is satisfied according to his needs. In that case this business unit can borrow short-term capital from a financier on conditions of selling his unpaid sales invoices as a security pledge of borrowing money.

This type of financial deal between the financiers and the business units or companies is termed as Invoice finance. It actually provides a great relief to a company, when it is not having enough funds to meet the expenses needed to fulfill the order of a customer. The financier gives cash immediately to the business unit, which is usually 70-80% of the face value of its sales invoice. When the customer pays the full payment to that financier, the financier pays the balance of the already paid face value to the borrower company, after deducting the discount fees and other applicable charges required for this financial deal.

Ultimately this business unit is totally benefited, as it only receives its sales payment earlier instead of getting it after the delivery of the service. Invoice financing can be of two types - in disclosed type of invoice financing, the financier collects the sales invoices directly from the customer on behalf of the company and the customer is informed by the borrower company to pay to that financier; in non-disclosed type, the information of this invoice sales is kept secret from the customer and the payment is made to the bank account or to a PO Box address of the financier which are given on the invoice slip, without mentioning the name of the financier in it and this payment is taken care by the borrower company only.

The financier may charge a monthly fee, apart from the interest on the borrowed amount; also some financiers may demand a floating charge as a security of this invoice sales deal. The main benefits of this financial deal are that the business units receive the cash as soon as they raise the invoice for their service and send to the customer, thus improving its cash flow and working capital position; this deed can be kept confidential from customers or other business alliances if wanted; this type of deal is more flexible than debt factoring as the borrower company pays interest only on the amount borrowed; the extra balance that the business receives, can be utilized in business costs.

Generally companies taking this loan for fulfilling their orders, repay it as soon as they get their payments from their customers. When a company takes this loan for buying some extra stock in special discounts, it repays after selling off that stock in a higher price. Both new and older companies can apply for taking this type of loan; but financiers may tend to give the loan to a new company for a much shorter term, as the financial risk is less when the loan repayment period is shorter.

Thus Invoice Finance can be properly utilized to improve the cash flow of a business if it faces certain financial crisis in delivering its commercial service. Short term business loans helps to avail profitable situations in a business much quicker, with emergency fund supply to overcome the cash flow breaks, resulting in rapid growth of that business.