Any business big or small can face a cash crunch at any time. While bigger businesses seek and use all viable solutions to keep their businesses running, smaller companies often don’t have many alternatives at their disposal. Businesses like these require financing mechanisms which are compliant and aligned to their cash flow needs.

Invoice financing is a mode of short-term borrowing which is provided by various financial institutions to its customers, depending on their unpaid invoices. More often than not, invoice financing caters to the needs of meeting short-term liquidity of a company. Outstanding invoices are account receivables, which accounts to the company receiving the invoice amount at a later date.  

Invoice financing comes with an advantage; a company can expand its business with the help of account receivable as this amount will be considered as opportunity cost. These funds can be utilised by the business for its expansion and growth.  

One vital feature to understand in invoice financing is that if an organisation fails to make payments to the financier; it can utilise the bill as security. Invoice financing is done by two methods- factoring and discounting. 

A financial transaction where a company sells its invoices (accounts receivables) to a factor (a third party) at a discount is called invoice factoring. At times, a company will factor its receivable assets to stick to its current and urgent cash needs. Credit risk is relieved by factoring invoice.  

Invoice discounting is the recurring process of getting short-term credit against a firm's unpaid invoices. These unpaid invoices work as security as the financier is aware that the firm is owed that amount of money. Invoice discounting is usually kept classified without the firm's client having any knowledge about it.  

With the emerging businesses, invoice factoring has opened new avenues of growth for MSMEs and SMEs. The only goal left is to make this facility available to all.