What is invoice financing

Are your goals and growth plans limited by financial possibilities or complexities? Chances are that you’re limited in your day-to-day business too. Unpaid invoices are one of the most frustrating and dangerous elements of entrepreneurship. If you’re limited by unpaid invoices and are being held back due to financial limitations because of it, invoice financing could be the solution for you. 

What is invoice financing?

Invoice financing is a short term loan based on the customers (borrower) unpaid invoices. It therefore only solves the problems which have to do with cashflow. The unpaid invoices serve as proof that the borrower can pay back the loan. Essentially, the definition of invoice financing is more or less exactly what the term implies: The lender takes care of the unpaid invoices of the borrower, who can proceed with the day to day business, without having to worry about a stagnant cashflow. The lender of course then charges an additional interest rate which is determined before providing the loan. Next to this, arrangements are made on how long the collection process may take.

How does invoice financing work?

As stated above, with invoice financing the invoices are being financed based on a short term loan. This loan has to be paid back by the borrower, after the invoices are paid by the debtor. Of course, the business model is built on adding interest to the original loan. The interest rate can vary, based on the lender and/or loan itself. With invoice financing, the responsibility over the invoices is still ‘in house’ and not outsourced to a third party.

What’s the difference between invoice financing and factoring?

Another form of invoice financing is called factoring. However, there are some essential differences between the two of them. 

With factoring, unpaid invoices are being bought by a third party, for a specific percentage of the price, for example 90% of the total amount. This means that a third party takes full responsibility for the invoices, while the original creditor is selling their invoices at a discount. One major benefit of factoring is that you receive a large part of the invoice(s) directly on your bank account. Next to this, you don’t have to manage the specific debtors anymore. This could help you to keep moving and grow your business. However, it also means that you applied a pretty expensive solution. While percentages may vary, with factoring you willingly accept that a chunk of your revenue is fading away because your debtors didn’t pay the invoices. These debtors are now also being confronted with a new creditor: the third party who ‘bought’ your sent invoices. This can lead to confusing and unpleasant experiences for your customers.

What are the benefits of invoice financing?

Invoice financing has one clear benefit: an improved cashflow. A healthy cashflow is essential for every organisation, big or small. With invoice financing, the borrower doesn’t have to worry about unpaid invoices, while proceeding with his/her day-to-day business.

Finance your invoices using Payt

As discussed above, efficient and effective debtor management is very important, but often takes a lot of time. Moreover, nothing is more annoying than a customer who does not pay an invoice. Payt makes credit management easy and clear for you and your customers. Get paid faster and boost your customer relationships with less work, less worry, and more control. Discover all our [features](<https://www.paytsoftware.com/features/).

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Sander Kamstra
Written by Sander Kamstra LinkedIn profile
Sander Kamstra is director and one of the founders of Payt. He is an entrepreneur in heart and soul. He likes to work with people who are just as driven as he is to achieve success by setting the right priorities and making smart choices.

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