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What is Invoice Financing and why do we need it?

History of Invoice Financing and why do we need it?

Looking for the answer to ‘What is Invoice Financing’? Here we go:

Cash flow and working capital are two finance terms that get thrown around a lot. If you’re running a business, you will know what importance they hold in the book. A running business has certain requirements that need to be met constantly: 

  • To launch new products 
  • Hire new employees 
  • Meet company expenses 
  • Stock up on supplies

A line of credit in the form of cash flow and working capital helps sustain the business. The businesses are usually Small or Medium enterprises or business ventures that are new. 

SMEs and businesses that are starting out are putting themselves out there while simultaneously struggling to finance the company’s basic needs. 

The chain of needs in a company is very important to handle.

Invoice Financing was introduced to solve this problem. The simplest way to define it is a process that helps the one in financing accounts receivable. There are companies that will buy your invoices and in exchange will give you the funds that your client intends to pay. Invoice Financing can be done in two ways 

  • Invoice Factoring 
  • Asset-based loans 

It is a practice common with SMEs while asset-based invoice financing is common in bigger companies where they need a bigger line of credit. It is also easier to get your working capital through invoice financing than getting a line of credit from the bank. 

Finance and its subsets: A history

Finance is a broad word. It has come a long way since the first form of trade was invented. The history of finance has been divided into its subsets. In the world of corporate finance – business finance is a prominent sector. 

Invoice Factoring comes under the category of business finance, its roots dating back to the 1400s in England. The East India Company and the Hudson Bay Trading company used invoice financing in their business. It is often referred to as Factoring and it became prominent when the British Empire started colonizing The New World. 

Factoring has been helping civilization progress for centuries. In the 1620s, Pilgrims brought Factoring to America. Fast forward to the 1800s, the textile industry was booming – and they used invoice financing to enter a successful age of business. There were different laws surrounding the practice of invoice financing but in 1949, كAmerica adopted a law that said there was no need for the debtor to be notified if there’s Factoring involved in the business. This law was adopted unanimously around the world later on. 

Successful business owners today are on the top of their game today because they made smart decisions to expand and sustain their businesses – just like how wise traders and businessmen have done for hundreds of years. If you have an SME in Saudi Arabia, you can definitely explore your options at Lendo. There are a few requirements that a business needs to meet in order to have access to invoice financing but if there’s a sure-fire way to get cash flow and working capital to get your business on track – it’s invoice financing. 

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