If you’ve been investing in crowdsourcing platforms, you may have come across deals about “Invoice Financing”. Yes, indeed, it is one of the relatively lower risk investments in crowd funding.
But how much do you really know about invoice financing? Let’s review some of those you already know and some which you may haven’t taken note of.
So, first of all . . .
In simplest terms, invoice financing is providing in advance the cash that a business expects from its own account receivables. Your investment in this case rests on the fund seeker’s unrealized income, which usually materializes between a few days and a few months. Of course, your investment would make money from the percentage of the invoice amount.
So, what is there to take note about that? Here they are . . .
The tenure of invoice financing is constrained by the terms of the amount due from a fund seeker’s customers. Most of these receivables become due in 15-90 days. So, the tenure of the investment is defined largely by that.
Since invoice financing basically deals with money that a fund seeker already earned but has not yet realized, the fund seeker has a wide range of options about what to do with the funds raised via invoice financing.
Most of the time, funds raised via invoice financing are used to pay salaries, get supplier discounts for early payment or bulk purchases, and other uses of operational nature. It can also be used to purchase equipment to improve your productivity. It can even be used to augment an existing bank loan.
Verifying the reliability of a fund seeker’s account receivables is much simpler compared to verifying the ability of a company to make enough money to pay a bank loan and some besides. This is why processing of bank loans tend to be much more complicated.
For that reason, invoice financing is ideal if a fund seeker needs faster funding. There’s a price to pay for that though, which leads us to . . .
When a fund seeker compares the fee that he’s paying to the interest he would have been charged if he borrowed the amount from a bank, he might scratch his head at the substantial difference.
If the fund seeker is mindful about costs, a loan from a bank would certainly be much less expensive. But then a bank loan is also more complicated and time consuming.
So, it’s a trade off between speed of processing and costs. The Fund Seeker has to decide very carefully.
At the end of the day . . .
When a fund seeker’s customers are taking time to pay, invoice financing can save the day by providing much needed funds to finance operations or grab opportunities, which a fund seeker would otherwise miss if they wait until their customers paid them.
From the point of view of investors, funds needed via invoice financing are leveraged against income that has already been made, but not yet been realized. That gives them a greater amount of peace of mind.
Besides, investors are able limit their risk by advancing only a percentage of the invoice amount to the fund seeker.
What other things do you think crowd funding investors should take note of regarding invoice financing? Feel free to share your thoughts below.