One such invaluable funding strategy is receivables finance, also known as invoice financing. Using receivables finance, businesses can obtain immediate access to a portion of their outstanding invoices’ value. Thus they can effectively turn their accounts receivables into immediate funding. This allows businesses to meet their operational expenses, invest in growth opportunities, and ensure smooth functioning without being tied down by extended payment cycles.
Let us discuss in detail what is receivables finance and how it is the next big thing for businesses in 2023.
Receivables finance, also called accounts receivable financing, helps businesses receive funding by selling outstanding invoices to a third party, known as the funder or financer. Such an arrangement allows businesses to get early payments on the invoices, providing them with working capital to fuel growth and even help with operational costs. Receivables finance is a funding method that enables businesses to receive funding matching the amounts owed to them by customers in outstanding invoices. By financing their receivables, businesses can invest in growth and innovation.
To understand how receivables finance helps businesses meet their funding requirement, it is essential to know how receivables finance work. Here is a simple explanation of how this financing is usually carried out –
a) The business sells its goods and services to its customers. After selling the goods or services, the business creates invoices that reflect how much the customers owe and when the payment is due. These outstanding invoices represent the money the company will receive in the future.
b) Instead of waiting for the customers to pay on the due date, the business can leverage receivables finance. This means the company can sell these outstanding invoices to another business or a financial institution often called a “financer” for a fee.
c) The financer pays the business a portion of the money owed on those invoices right away. So, the business gets the money sooner than waiting for the customers to pay later.
d) When the due date arrives, the customers pay the full amount to the financer. The financer keeps the fee they charged, and the rest of the money goes back to the business.
Listed below are some of the major ways in which receivables finance help businesses grow -
a) Quick access to funds: Receivables finance provides businesses with immediate cash by converting outstanding invoices into money.
b) Working capital boost: Improved cash flow allows companies to manage day-to-day operations more efficiently.
c) Growth opportunities: With readily available funds, businesses can take advantage of expansion opportunities and increase market presence.
d) Invest in innovation: The extra capital enables investment in research, development, and new product offerings, driving innovation and staying competitive.
e) Strengthen supplier relations: The funding from receivables finance can be used for early payment to suppliers. This enhances relationships and may lead to better terms and discounts, supporting growth.
f) Flexibility in cash management: Businesses can allocate funds strategically to meet various needs, like inventory management and hiring.
g) Lower debt dependence: Rather than relying solely on loans, receivables finance offers an alternative, lowering debt burden and enhancing financial stability.
When a business sells goods or provides services to its customers, it often allows them the option to buy now and pay later. This means the customers get some time before they have to pay the company for the good or service they bought or received from the concerned business. While this is a highly beneficial arrangement for the customers, businesses, especially small and medium ones can be affected by the lack of immediate payment, and if the payment cycle goes up to 60 or 90 days, their operational capacity might also get affected. This lag can be met with the receivables finance. From the easy and immediate financing thus availed, businesses can use this cash flow to meet their other needs, obligations or even expansion or innovation aspirations too.
Note that as a growing business if you are planning to partner with a financer, make sure the onboarding process for the receivables finance is done properly. It is best recommended to take the expert services of a platform like Finverv that offers customized and impeccable services not only to support onboarding but setting up payments, reporting, documentation and much more.