Invoice financing: The easy lender way for small businesses

Published · 2 min read

Late payments are a problem for small businesses across industries. Many buyers expect their suppliers to accept payment months after delivery. This is problematic for small businesses who rely heavily on cash flow for daily operation.

Invoice financing is one solution to getting paid faster and avoid the hassles of chasing payments.

How It works

With invoice financing, the business owner receives an upfront payment from the customer. The main advantage is this is a self-liquidating option, which means the business is not taking on extra debt. It may be used for larger invoices or all of them, delivering an upfront injection of funds against approved invoices before they are due. This service allows small and medium companies to access financing by selling their outstanding invoices to professional investors who can access a new asset class with double-digit returns.

Here’s an example: A supermarket chain buys from a small business supplier and approves the invoice. The small business then transmits this invoice to the financer, who pays the small business on the agreed date of the invoice or earlier, if requested. Then it becomes the financer’s responsibility to collect the payment from the supermarket chain, not the supplier.

This service improves cash flow and creates a healthier customer – supplier relationship. The market for invoice finance is expanding as more companies start to understand its benefits.

How FinTech is disrupting

Invoice financing and supply chain is not new to banks, but financial technology (FinTech) firms are becoming new players. The traditional process for banks to turn invoices into cash was time-consuming, riddled with paperwork and an expensive way of credit.

However, FinTech firms are not using retrospective data; they look for something real: an invoice that will get paid. That piece is what defines the price of the debt, or the price of finance, its risk. Players like MarketInvoice, NoviCap or Advanon have disrupted the invoice finance market by building marketplaces to connect buyers and sellers. They can provide a faster, more flexible, and transparent way to finance companies. Small and medium companies can apply online and start discounting their invoices in less than two business days. Once registered, companies upload invoices that can be sold to a pool of professional investors instantaneously.

This new world of invoice financing eliminates the need for bank intermediation, reducing bank costs. It also provides increased flexibility, allowing businesses to sell single invoices only when needed, without fees.

FinTech firms offer new technologies that make early payments possible online. They can quickly set suppliers up on their platform. Banks’ early-payment programs were once typically reserved for larger businesses. But FinTech companies have made invoice finance available to the small business too.

Invoice financing can help ambitious small businesses scale new heights. What do you think? Do you use invoice financing in your business?

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