What is Invoice Financing?
A lot of loans that are uploaded on Debitum Network belong to the invoice financing category. For those, who have studied finance/economy the term means something, for those who haven’t it may be confusing. Some investors seeing the term under loan type sub-section wonder what it is, whether it is safer than consumer loans, or simply how the funding of these types of loans works. This blog post is meant to answer the questions.
How does Invoice Financing work?
In invoice financing, a borrower uses his customers’ outstanding invoices to borrow money. A lender buys those invoices. In this way, an invoice for sales becomes security for a loan. It is great because business owners who use this way of borrowing, do not risk losing equity of their company. Small business companies often use this method of funding to get cash without having to wait for payment from their customers to arrive. The payment terms can be a drag as businesses often need cash fast for their operational expenses. Invoice financing allows you to transfer payment terms to your lender and you get the necessary money immediately. The lender has invoices as collateral to get payments from the customers of the borrower. Companies who choose to use services from an invoice financing company can get up to 90% of the value of their invoices.
Advantages of Invoice Financing
Improved cash flow
Day to day expenses, salaries, lease, and other financial obligations may significantly slow down a company. Fortunately, with invoice financing, businesses do not have to wait for 60, 90 or more days for their customers to pay for invoices. Funds can be available in a matter of 72 hours, sometimes even less. So, companies can carry on doing their day to day business operations or expand without experiencing a drag from delayed payments. With our partner and loan originator Factris, borrowers can usually get cash in under 24 hours.
Easier qualification requirements
Commercial banks reject 80% of applications for a loan from small businesses. Tons of paperwork, strict collateral requirements, time-consuming process are some of the things that put small companies in a deplorable situation while waiting for the approval for a loan. Invoice factoring solves the problem as most alternative lenders will be satisfied with proof of a stable client base and revenues exceeding 50,000 euros. These and a few more requirements help alternative lenders to screen potential borrowers and select creditworthy ones.
Quick access to funding
Timing is crucial in doing business. If a company has to wait for 90, 120 days for payments to arrive before they can move on with their plans, their hands are tied and possibilities to grow remain very limited. With invoice financing, funds can arrive in a couple of days and a company will be able to function unhindered due to available cash.
Credit line increases with a company’s revenues
In invoice financing company’s credit line depends on the value and number of invoices. With the increase of revenues, amounts of invoices can grow and the company can access greater amounts from lenders. This way of funding creates possibilities to get more funds than a company can ever get from a commercial bank.
Minimum collateral requirements
As invoices serve as collateral with most lenders, companies do not usually have to pledge assets as security to get funds. This opens a door for young companies who lack assets to back up deals to get funds, which is hardly ever possible with traditional banks.
Reduction of late payments and bad debts
Late payments and bad debts can stall any business from going forward. Debt collection can be a lengthy and expensive process, which may harm a business even more. Invoice discounting will help a company to avoid that because invoice financing company will do credit analysis of the company that owes money to a business. They will also know how to deal with non paying customers and how to get back the funds.
What is special about Invoice Financing assets on Debitum Network?
Now you know most of the advantages of invoice financing loans. What else could make invoice financing loans on Debitum Network more appealing for investment? Most of the loans on our platform are short-term. We ask brokers to give assets not for the full term of the loan, but in the final stages. The logic behind that is pretty simple. If a borrower took a loan for two years and was paying off the loan for a year and a half, it is highly likely that he will also pay off the remaining part of the loan. Thus, we prefer to take the asset with that half a year tern till the repayment date, rather than the full term loan for 2 years. These short-term loans are safer, enable fast turnover of investors’ funds, and offer a possibility to make compound interest.
Low-risk assets and attractive interest rates
The vast majority of assets have a buyback guarantee, which means that if the borrower is late with the repayment by more than 90 days, the loan (with outstanding principal and interest) will be bought by the broker who issued the loan. This makes investing in the assets very low risk. The other incentive is that in the invoice financing category we have top interest rates among other platforms. Consumer loans may have higher interest rates, but they are riskier as bigger number of defaults can decrease investors’ returns. Thus, an investor on Debitum Network will be offered low-risk assets with yet attractive interest rates.
Top asset of the week
The top asset for this week comes from our partner and loan originator Factris. The borrowing company specializes in wholesale of hardware equipment, it has more than 4.1 million EUR in revenues, employs more than 25 people, and has been in business for more than 21 years. Sounds good enough? Check out the asset and if you like what you see, you can invest right away.
Disclaimer: Investments in financial products are subject to market risk and any investment should only be done with risk capital. The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.