The usefulness of invoice finance

The usefulness of invoice finance (IF) as a worthy alternative to bank loans is controversial since business owners believe it has relatively high onerous terms and cost.  Permjit Singh attempts to break this biased opinion in the article “Is Invoice Finance a Credible Alternative to Bank Loans?” A summary of the author’s suppositions helps business owners make informed decisions to meet business objectives.

Singh starts by defining invoice financing by saying it denotes the sale of sales ledger of a company for cash offering a continuous cash stream as the company issues invoices to customers.  The business enterprise might retain cash collection or transfer it and related credit risk to a funder.  The writer states that some conventional facilities for IF can impose charges and fees and demand commitment and security from a business enterprise to sell its whole sales ledger. Alternatively, some companies offer single invoice finance that is more flexible.

The use of single invoice finance magnifies the benefits of IF. Singh states that this alternative refers to the acquisition of one invoice from a company for cash. A single invoice saves a company from the hassle of selling more invoices and uses it to raise the cash they require. Additionally, a company would not have to offer security, such as a personal guarantee or a debenture. Both single and multiple IF are essential tools for managing cash since they liquidate the illiquid asset, that is, they change debtors to cash. The company can reinvest cash realized in profitable initiatives or utilize it to balance the costly debt.

Singh also clarifies the view of critics of borrowers who argue that invoice financing is costly on an annualized basis than a conventional loan. He states that such comparison resembles comparing oranges to apples since the two financing instruments operate differently. Single invoice finance is discrete, implying that it offers finance that covers three months or less. Conversely, a loan is a constant source of finance.  As such, the annualization of invoice finance cost is not consistent with its application. Singh supports his argument by saying that although loan interest rate might seem attractive, the cost of arrangement and administration of a loan must also be considered. Invoice financing has a unique cost of arrangement and administration that can be higher or lower compared to a bank loan.

Singh concludes by stating five points that prove invoice finance as a better option to a loan.  Firstly, IF might not require security. Secondly, Invoice Financing transforms an entity’s debtors into cash, which can be reinvested to generate positive company returns. The third reason Singh provides is that IF allows a company to transfer the credit risk of a debtor. Fourthly, IF is a better alternative that companies can use to raise the cash. Furthermore, IF avoid depleting the restricted credit capacity of a business. Lastly, invoice financing is better than a bank loan because it reduces dependence on the banking sector.


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