Invoice Financing: Everything You Need to Know

Business Growth
March 28, 2023

If your business is looking to fill short-term capital gaps, would it be wise to take out a term loan from a bank? Not if you need cash quickly to cover payroll, taxes, raw materials, or overhead costs.

In the Philippines, most bank business loans require a waiting period of 45 to 75 days. In addition, small and medium enterprises (SMEs) are finding it increasingly difficult to obtain traditional business loans from banks. This is due to many factors, such as the long list of documentary requirements, a minimum requirement of at least 1-3 years in operations, and an annual business income threshold that varies from bank to bank.

If your business needs money to cover critical, short-term business expenses, you simply cannot afford to wait. Fortunately, you can use your accounts receivables to obtain financing and meet your short-term cash flow needs through Invoice Financing.

What is Invoice Financing?

As the name suggests, Invoice Financing is a type of alternative financing and is a quick and easy way to obtain extra cash by using your invoices. First Circle defines an invoice as a document issued by suppliers to buyers after a product or service has been delivered as a bill or a statement of the amount due to be paid after a specified timeline.

Through this financing alternative, a third-party company, usually a financing company, provides business owners immediate access to additional funds for the money they are waiting to collect from an invoice.

Invoice Financing is best suited for short-term situations, such as temporary cash flow gaps. Thus, it may be the best fit for SMEs seeking fast, alternative financing sources.

Invoice Financing vs. Invoice Factoring

There are two forms of invoice financing: invoice discounting and invoice factoring.

Invoice discounting is another name for invoice financing; it is also sometimes known as accounts receivable financing. Similar to the definition above, invoice discounting is when a company borrows money against its outstanding invoices or accounts receivables. A third party, usually a financing company, will provide you a portion of your outstanding invoices upfront — usually between 60-80% — and charges interest on your borrowed amount until the invoices are paid in full. When your company creates new invoices, you also get the option to obtain more funds.

Invoice factoring works in a similar way, except that you are ‘selling’ your outstanding invoices to the financing company in exchange for money upfront. This means that the financing company will be in charge of collecting payment from your clients using their own credit control team, essentially taking ownership of your debtor ledger. With invoice discounting, your company will maintain control of your ledger, and you retain the responsibility of collecting payments from clients.

Between the two, invoice financing lets your business retain control and ownership of your invoices, which means you retain opportunities to maintain your business relationship with clients and buyers. It is no secret that strong customer relationships foster loyalty and repeat purchases; thus, we recommend invoice financing over factoring for short-term funding needs.

Here’s a quick rundown of some more benefits that businesses can get from invoice financing:

The Benefits of Invoice Financing

1. Easy way to get funding

Compared to bank loans and business lines of credit, obtaining cash through invoice financing is much easier. Bank financing usually takes weeks to process. But with invoice financing, you can get approved in as fast as three business days. If you need cash to cover your recurring business expenses.

2. Early access to your own money

The biggest downside of bank loan financing for short-term working capital is that it shows up on your balance sheet and limits your future financing options where bank financing might be a better fit—like purchasing plant and equipment to expand your manufacturing capacity or opening an office in a new city for example. With Invoice Financing, the hassles associated with loan processing are eliminated or streamlined. You are merely advancing cash from your unpaid invoices in a much simpler, faster, and more convenient process.

3. A continuous flow of cash

In business, the saying “cash flow is king” is an absolute truth. Cash for a business is like blood for a human body—the business dies if it runs out of cash. Unfortunately, the nature of many business expenses is that they are not matched well to incoming cash flows. The expenses recur regularly and put constant pressure on your bank balances. Cash inflows, on the other hand, are highly variable by comparison.

Using invoice financing to make prudent cash management decisions enables SMEs to match incoming cash with expense requirements, especially in times when business growth requires significant new investment in recurring monthly expenses.

4. Confidence in growing your business

When growth opportunities come knocking, the first thing a business owner should be concerned with is whether cash on hand is sufficient to support requirements for the new opportunity. Before taking on a new contract or a new project, ensure you have enough funding to support it. With the convenience and quick approvals for invoice financing, you can confidently grow your business, and take on more clients and projects without fretting over your ability to meet cash needs.

5. Better business focus

Staying focused on the things you need to do to achieve your business goals is certainly difficult enough that you don’t need cash flow worries to distract your focus. Through invoice financing, you can zero in on your priorities and focus on the direction you want your business to take.

How to Qualify for Invoice Financing?

At First Circle, loan eligibility starts when you complete the Personal and Business TrustPass. To get the Personal TrustPass and the Business TrustPass, you need to submit the following requirements:

Personal Requirements

  1. Primary ID
  2. Secondary ID
  3. Email address

Business Requirements

  1. DTI or SEC Certificate of Registration
  2. BIR Certificate of Registration
  3. Duly-filled out General Information Sheet (for Corporations only)
  4. Proof of Billing

Upon completion, simply submit your invoice and wait for the cash to come through.
Many business owners hold out on growing their business because they do not have the funds to expand their operations. After all, equipment acquisition and new raw materials require additional funding.

Invoice Financing opens doors to more business growth possibilities, so you won’t have to stall your SME’s momentum. Are you ready to move your business to the next level? We can help.

First Circle is a company that takes pride in empowering local SMEs to grow and scale by providing easily accessible funds to cover capital gaps. Click here to apply for business financing.

Need business financing today? Apply for one with First Circle by clicking here.

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