Invoice financing explained with a practical example
Imagine a small business completes a R100,000 order for an established customer.
The supplier has delivered the goods, issued an invoice and expects payment in 60 days.
However, the business needs money immediately to:
- Pay employees.
- Purchase materials for the next order.
- Pay transport costs.
- Continue production.
- Meet other operating expenses.
Invoice financing may allow the business to access a portion of the unpaid invoice before the customer settles it.
For example, if a finance provider advances 80% of the invoice value:
| Description | Amount |
|---|---|
| Invoice value | R100,000 |
| Illustrative advance at 80% | R80,000 |
| Remaining amount | R20,000 |
| Financing fees and charges | Deducted according to agreement |
The actual amount received and the final settlement depend on the provider’s terms.
Invoice financing versus factoring
These terms are related but should not be treated as identical.
Invoice financing
A business uses unpaid invoices as the basis for borrowing or accessing funds. The business may remain responsible for collecting payment, depending on the arrangement.
Factoring
The business sells or assigns its receivables to a factor. The factor generally takes responsibility for collecting the invoice, subject to the agreement.
The legal structure, collection process, recourse arrangements and fees can differ considerably.
Questions to ask before signing an agreement
- What percentage of the invoice will be advanced?
- What are the total fees?
- Are there monthly administration charges?
- Who collects payment from the customer?
- What happens if the customer pays late?
- What happens if the customer disputes the invoice?
- Is the arrangement with recourse or without recourse?
- Are there minimum invoice values?
- Is there a minimum monthly turnover requirement?
- Are there restrictions on which customers’ invoices can be financed?
When invoice finance is a poor decision
Avoid using invoice financing when:
- The customer is unlikely to pay.
- The invoice is disputed.
- The business has very low profit margins.
- The financing fees exceed the benefit of receiving money early.
- The business is using new financing to cover recurring operating losses.
A practical decision test
Before accepting invoice finance, calculate:
Expected financing cost versus the cost of waiting for payment.
If waiting 60 days means losing a confirmed profitable order, financing may make sense. If the business can comfortably wait, paying financing fees may be unnecessary.
Frequently asked questions
Some providers work with SMEs, although minimum turnover, invoice values and customer requirements differ.
Some providers consider invoices issued to government departments, but eligibility depends on the department, invoice status and the finance provider’s policies.
Traditional invoice finance generally requires an eligible invoice or receivable. Purchase-order finance is a different funding arrangement.
It can, especially if the finance provider contacts the customer directly. Understand the collection process before signing.