Typically, businesses issue invoices to customers when they purchase goods and services. Such invoices are assets belonging to the company and can be traded like any other asset under the ownership of the business. This trading is called invoice financing. Fundamentally, invoice financing involves the sale of invoices as assets at a discounted price to an invoice financing firm.
Unlike other transactions, businesses receive payment for the sale of their invoices immediately. This gives it the upper hand over other forms of funding which usually take longer times. Despite its apparent advantage in maintaining cash flow for businesses, invoice financing still has relatively low adoption rates. The main reason for the unpopularity of this method is the prevalence of myths about it.
The following are the 9 most common myths about invoice financing that prevent business from considering this option.
1. Invoice Financing is Expensive
Expensiveness is perhaps the most prevalent myth concerning invoice financing. Most people inexplicably presume that these transactions are costly because they provide funding that is accessible throughout and can be used for a variety of purposes.
However, invoice trading costs the same (maybe even cheaper) as loans and overdrafts. Moreover, it is more advantageous over its competitors because it can be processed instantly and can be accessed throughout.
2. Invoices Financiers will Pursue Clients for Payments
Although there is a widespread belief that clients of a business that has resorted to invoice financing will be pursued for payments, this not true. The peddlers of this myth claim that the customers will know that their debt has been ‘sold on.’ If true, such a development can damage the relationship between the business and its clients.
On the contrary, most invoice trading transactions are confidential. This means that customers are never contacted for payments.
3. Invoice Trading is meant for Troubled Businesses
Another popular misconception about invoice financing is that it is designated for struggling enterprises. Contrariwise, invoice trading is a means of generating additional income for your businesses. As mentioned above, selling unpaid invoices can help in maintaining cash flow because such transactions are processed fast.
The increasing adoption of invoice trading is solid proof that this method of funding is not obsolete. Also, invoice finance companies tend to be more flexible than conventional financiers and are well-suited to understand the challenges facing businesses.
4. Businesses have to Fund their Entire Sales Ledger
Different businesses have varying requirements when it comes to financing invoices. For instance, a company may want to trade invoices belonging to customers who pay after long periods.
In the past, the majority of invoice finance providers asked businesses to finance their entire sales ledger. This, however, is not the case nowadays. Most invoice traders have the provision for selective financing. This enables a business to choose the specific invoices that they wish to trade. You can learn more about InvoiceFinancingAustralia.com.au here.
5. Invoice Trading Contracts are Lengthy
One of the excuses used by businesses that are hesitant to adopt invoice financing is that they will be forced to enter into a lengthy agreement. While this was common with traditional invoice finance providers, current companies offer considerably more flexibility in this regard.
In addition to allowing the aforementioned selective financing, modern invoice trading firms enable businesses to choose the period they wish to transact with them.
6. Invoice Financing involves Large Volumes of Paperwork
Usually, obtaining funds for business purposes is characterized by filling several applications forms and accompanying with large volumes of supporting documentation. In the case of invoice trading, the process is straightforward. All that is needed are invoices and a few legal documents.
7. Invoice Financing Requires Businesses to provide Security
The standard procedure for acquiring loans from conventional financiers such as banks requires applicants to provide security. Usually, the security is in the form of high-value assets such as homes, land titles, cars, and so forth.
Inversely, invoice trading does not require businesses to avail any assets as security. The invoices on sale are sufficient to initiate the funding process.
8. A Business must be established to access Invoice Financing
Yet another bottleneck of accessing funding from banks and similar institutions are the stringent prerequisites. It is very hard for upcoming enterprises to get loans from banks, mainly because they focus on the longevity of the business as well as its turnover.
On the other hand, invoice trading does not discriminate businesses according to their size. Rather, an application is judged on merit, including its present and future performances.
9. Invoice Financing is Similar to Invoice Factoring
Though interchangeably used, invoice financing is significantly different to invoice factoring.
Invoice financing is similar to a loan in that the invoice finance provider pays for the debts owed by a business’s clients as indicated in the transaction invoices. Most importantly, invoice financing is a confidential pact between the services provider and the company.
On its part, invoice factoring is the sale of a business’s debtors’ ledger to a third-party, known as the factor. The factor takes control over the ledger and is charged with collecting payments from the debtors. This means that clients (in this case the debtors) must be informed of the deal between the business and the invoice factoring provider.
It is obvious that there are lots of fallacies being spread about invoice financing. At a time when conventional financiers have raised the bar regarding access to loans and overdrafts, invoice financing is seemingly the ideal method for businesses (especially SMEs) seeking a short-term funding solution to maintain a constant cash flow to enable smooth day-to-day operations.
Currently, there are several companies that offer invoice financing services to businesses. One such firm is Invoice Financing Australia. Here, clients can access funding from as little as $5,000 to a maximum of $5 million, depending on the volume of the invoices they provide. This company prioritizes speed in its operations, as applications take five minutes and are always responded to within a few hours. Furthermore, approved applications are processed and the funding released in less than 24 hours.