Invoice financing: send a prepaid invoice

The money is already in your business account, and you haven't even sent the invoice yet. How? Factoring is where a factoring company buys your outgoing invoices for a certain amount, chases up these funds, and then collects on your behalf (in other words, it is an advance on your accounts receivable). Prepayment also works with invoice financing, but slightly differently.

What is invoice financing?

Invoice financing involves selling an invoice to a financing company. You are personally responsible for ensuring that these invoices are paid by your customers. They will not see that the invoice has been prepaid by a financier and that you have entered into a loan, and you will remain the initial point of contact for your business associates.

The prepayment will ensure that your business will have access to your working capital soon, so you can meet your short-term payment obligations, such as paying suppliers, paying salaries, maintenance, and restocking. It depends on your accounts receivable management how soon customers can transfer the amount of the invoice. You can then use this money to repay the financier.

How much will it cost you?

The fees payable for invoice financing vary depending on the business, depend on their approach, and whether they use financial technology (FinTech). Compare the terms and conditions and interest rates.

2 examples

1. The financing company transfers 90% of the invoice amount to your account. Once the funding term has passed, you will repay the financier 100%. The financier deposits the withheld 10% (less costs and interest) back into your bank account.
2. Invoice financing with support from FinTech. Financial technologies create a secure transaction process on a platform, fees are low, and you use a basic IT connection. Smart data helps the financier assess the financial health  of your customers/buyers. Classification ensures that, for example, 80% of the invoice (less financing costs) is paid out to you. Once the payment period has expired, an amount will be deducted from the principal of the loan, plus interest payable to the financier.

Worth your business’s while?

If you supply products or services to the business market, you often sell on account. Since this means you do not receive any direct payments, this could potentially cause problems for your business’ cash flow. However, as you do need these funds to keep your business running, invoice financing might be a good option for you. This offers the additional benefit that you receive a few percentages discount on your invoice if you pay within one week, resulting in further gains.

Payment terms in the Netherlands have been increasing for SMEs, due to increasing prices. This could cause your business to run into financial difficulties. Cash flows run out, and there are no funds available for new purchases or to cover monthly expenses. Invoice financing offers a solution for payment delays on the part of customers.

Guidelines for acceptance

Providers of invoice financing services will be eager to land you as a client. You should take into account that these money lenders set terms and conditions in order to keep the deal attractive to both parties. Sector/industry, funding amount, the business’s financial statements, its history/track record, client or customer diversity, average invoice amount, and the number of monthly invoices issued all affect these terms and conditions. By compiling an accurate annual record, you can quickly research or supply this data.

3 tips

1. Invoice financing is not based on a minimum monthly limit; instead, you use this financing type at a time that best suits you. This gives you the flexibility you need.
2. Learn about the opportunities, and the terms and conditions offered by providers of invoice financing.
3. One alternative to invoice financing is a short-term business loan. This involves paying interest on the portion of the loan you have drawn down. You can use the loan to bridge the gap between the delivery or supply of your product, and payment by the buyer/customer.

Enlisting help

Get help to increase your chances of landing a financing deal. With the right adviser and a solid financial plan, you can get that 'yes' for your funding application. These advisers can help you. Do you have questions about financing and money matters? Call the KVK Financing Desk on 0800 1014. And watch the video Financing your business. It explains how to go about getting financing for your business.