What Is Invoice Financing and How Does It Work?

Every retailer and supplier wants to get paid for their business, but roadblocks to getting paid are a regular part of the supply chain. Invoice financing is one way to ensure that you get paid quickly and consistently for your business, even when invoices get stuck and payments are delayed.

What Is Invoice Financing?

Invoice financing is when a third party pays outstanding invoices to help businesses (including both suppliers and retailers) strengthen their working capital while waiting for payment from their partners.

For example, a supplier who uses invoice financing can get paid by a third party for an invoice that a retailer has not yet paid. Then, when the invoice is paid by the retailer, the supplier will pay the third party back.

Invoice financing allows businesses to maintain consistent cash flow, even when invoices payments are impeded. Some common reasons an invoice payment might be delayed are:

• Shipping or receiving delays
• Compliance errors
• Incomplete information or data discrepancies

It is important to note that some business will use the terms invoice financing and invoice factoring interchangeably, but they are technically different processes. Invoice factoring is more readily used by smaller businesses. It is a type of business loan where a supplier will work with a third party lender who then purchases any outstanding receivables.

Related Reading: Understanding Unpaid Invoice Details

The Pros and Cons of Invoice Financing

Invoice financing may not be the right solution for every business. When deciding whether it is right for you, it is important to review your current business practices to see if invoice financing fits within what already exists, would help solve a recurring issue, or add further roadblocks. Once you have assessed your current business practices, you can then review the overarching pros and cons of invoice financing to finalize your decision.

Pros of Invoice Financing

• Provides predictable cash flow, making it easier to plan further ahead
• Invoice financing improves working capital
• By stabilizing cash flow, invoice financing helps stabilize operations overall

Cons of Invoice Financing

• There is a risk of overdependence on invoice financing
• Third-party providers can be expensive, lowering the return on investment (ROI)
• Invoice financing will not solve foundational or systemic issues in your supply chain

How Invoice Financing Helps Suppliers

Suppliers across the supply chain are seeking ways to overcome cash flow challenges. Invoice financing is helping suppliers everywhere, but for maximum benefit, it is important to use it on top of other helpful adjustments. There are several steps suppliers can take to ensure they get the most out of adding invoice financing to their processes. Some of these steps include:

• Optimizing inventory management to ensure products are shipped on time
• Leveraging automation for invoicing and payments
• Implementing demand forecasting tools to better prepare for unforeseen circumstances

By using invoice financing in addition to optimizing their accounting and finance processes, suppliers can ensure that invoice financing will not become an expensive dependence but a useful tool to keep their business running smoothly.

Any supply chain business can benefit from invoice financing. Invoice financing helps suppliers and retailers get paid faster, allowing them to keep cash flowing consistently, which in turn allows business to run on a steady pace.

For example, Maspanadas had “several hundred thousand in receivables” and was “out of cash.” As an SPS Commerce customer, they were able to use SPS Invoice Financing to get the cash they needed to move forward and continue to grow their business.

Related Reading: Accelerating Growth With Invoice Financing

Invoice Financing FAQs

What Is the Difference Between Invoice Financing and Invoice Factoring?

Invoice financing is the process of a third party paying a supplier or retailer for outstanding, unpaid invoices. The supplier or retailer will then pay the third party back once the invoice is paid. Invoice financing allows suppliers and retailers to keep cash flowing regularly despite issues blocking invoice payment.

Invoice factoring is a type of small business loan that functions in a similar way to invoice financing but involves a third party purchasing outstanding AR from the supplier.

Is Invoice Financing Right for My Business?

Invoice financing may be right for your business if you have the budget for it and if you are regularly facing stagnation in your business due to unpaid invoices. It is important to assess your entire supply chain, along with vetting potential third parties, as part of determining if invoice financing is right for you.

How Much Does Invoice Financing Cost?

Invoice financing is a partnership with a third party, and every third party offering invoice financing will have a different cost structure. It is important to research your options heavily to determine what you have the budget for and which third party is best for you.

Sometimes the cost is tied to interest that may be levied on the funds provided by the third party. This percentage will vary from partner to partner. It is important to consider this when finding a partner for invoice financing, because this will also affect what repayment looks like as well.

How Do I Set Up Invoice Financing?

If you are already partnering with a third party for EDI, that third party may also offer invoice financing. Start with any third parties with whom you already partner. This is the most straightforward way to set up invoice financing, because you will already be set up in a portal where invoice financing exists at your fingertips.

For new partnerships, it is important to ask implementation and process questions to make sure that invoice financing gets set up correctly to prevent errors down the line.

Let SPS Commerce Help

Suppliers and retailers can tap into instant cash flow, streamline cash management, and enhance financial flexibility with SPS Commerce Invoice Financing.