How Does Invoice Financing Work?

The step-by-step process of how invoice financing works is as follows:

1. The business raises invoices on its customers for goods or services provided under normal trade credit terms, such as 30, 60, or 90 days.
2. The invoices are submitted to the invoice financing company along with supporting documents like purchase orders, delivery notes, statements, etc.
3. The invoice financier evaluates the creditworthiness of the customers and verifies the authenticity of the invoices.
4. If approved, the financier provides an initial advance funding of a specific percentage of the total invoice value to the business.
5. The business can use this advance to meet its immediate working capital needs, such as purchasing raw materials, paying salaries, and paying rent.
6. On the due date, the financier collects the full invoice amount directly from the customer and deducts the initial advance given to the business along with the fees charged.
7. The balance amount left after deducting the initial funding and charges is passed on to the business account by the financier.
8. The business does not need to follow up with customers for payments or wait for long credit periods to raise fresh invoices.
9. This cycle repeats as new invoices get generated each month, and the business submits them for financing.

Invoice financing thus allows continuous working capital availability based on submitted invoices.