No company can continue operations much less set up with the absence of enough resources. Cash is an asset that keeps any business running and without it we all know where they would end up. In fact money is a universal means of trade for gone are the days of barter although some transactions still resemble it such as exchange deals. However, money is the major means by which business owners acquire resources such as labor, land, buildings and raw materials. Unfortunately, cash is not easy to acquire. There are many methods by which business owners choose to raise their needed resources. Invoice finance in the UK for example is one main method which has also been gaining ground in other parts of the world.
Invoice financing draws its resources by allowing companies to advance the value of their customer invoices even before actual payment has been rendered by an owing customer. This allows them to improve their cash flows, hasten up receivables and avoid bad debts without having to get a loan and increase their liabilities. Other benefits of it include:
- It is a quick way to derive cash and can be made available within a day or two.
- It does not require you to present proof of financial capacity to pay as it is your customer’s capability that is required by the financing institution.
- It allows for a quick injection of cash in the working capital as it can make non-current assets available for current use.
- It does not reflect as a liability in the financial statements.
Invoice financing comes in two forms namely factoring and discounting. These two are found to have similar benefits but differ slightly in their procedures.
FACTORING refers to the sale of the said invoices to a financing institution often called a factor. It is basically the sale of an asset, In this arrangement the company agrees to get an initial eighty to ninety five percent of the value of their receivables from the factor while waiting to get the remaining balance less any fees only after collection from customers have been completed by the factor.
DISCOUNTING on the other hand uses the said invoices as a form of collateral. Here, the company gets the full value of the receivables in advance and proceeds to collect the payment from its customers. Once this is established, the company then reimburses the financing firm of the amount plus any fees or expenses that the latter has acquired.