Invoice financing (FI) is not considered a reliable source of financing among some business owners due to its relatively high cost and onerous terms. Is this perception justified? I will argue that it is not with the introduction of single invoice financing.

What is invoice financing?

It is the sale of a company’s sales ledger for cash that provides a continuous source of cash as the company issues invoices to customers. The company could withhold the cash collection or transfer the cash and the associated credit risk to the funder.

Some conventional FI installations can impose numerous types of fees and charges, and require security and a commitment from the company to sell the entire sales book to the finance company.

Some companies offer a refreshing financial alternative, offering to buy a single invoice and charging only one fee, and generally offer a more flexible financing alternative.

What is single invoice financing?

As the name suggests, it is the purchase of a single cash invoice from a company. The business does not need to sell more invoices, so businesses can use single invoice financing to raise cash when they need it. Also, they may not need to provide a guarantee, such as a personal obligation or guarantee.

Single or multiple FIs are effective tools for cash management because they liquidate illiquid assets, that is, they convert debtors into cash. The company can reinvest the cash obtained in profitable projects or use it to pay off expensive debts.

Some borrowers might argue that on an annualized basis, the cost of bill financing is high compared to a conventional loan. That comparison is like comparing apples to oranges because the two financial instruments work differently. A loan is a continuous source of financing, while single invoice financing is discreet – it provides financing for up to 90 days or less. Therefore, the annualization of the cost of financing the invoices is not consistent with their use.

Although the interest rate on a loan may seem relatively attractive, the cost of organizing and managing it must also be considered, such as agreement, commitment, non-use and exit fees, plus service charges and legal costs. of the documentation. There may also be costs to pursue and recover bad debt or to pay for credit protection. Invoice financing has its own set-up and administration costs that can be higher or lower than a bank loan.

Bill financing is therefore a credible alternative to a loan because:

• converts a business’s debtors into cash that can then be reinvested to potentially generate a positive return for the business.

• the company can transfer the debtor’s credit risk.

• Avoid depleting a bank’s limited creditworthiness for a business and

• diversifies the sources of financing of the company, thus reducing its dependence on the banking sector.

• businesses can use it to raise cash as needed

• security might not be necessary