Invoice financing is a process in which a business obtains funding by selling its outstanding invoices to a third party, known as a factor.
The factor provides the business with an advance payment for the invoices, usually around 80–90% of the total invoice value, and then collects payment from the customer when the invoice is due. The remaining balance, less the factor’s fees, is then paid to the business.
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In this article we will outline a typical invoice factoring workflow, and how automation and AI technology makes it more efficient and benefits all parties involved.
Here is an overview of the invoice financing workflow:
- A business sells its products or services to a customer and issues an invoice for payment.
- The business then submits the invoice to a factor for financing.
- The factor evaluates the invoice and the creditworthiness of the customer to determine the risk of non-payment.
- If approved, the factor provides the business with an advance payment for the invoice, usually within 24–48 hours.
- The factor then collects payment from the customer when the invoice is due.
- Once payment is received, the factor deducts its fees and remits the remaining balance to the business.
Customisable workflow with AI and Automation
AI technology and automation can significantly enhance the efficiency and profitability of the invoice financing workflow for all parties involved. Here are a few ways:
- Automated invoice processing: AI-powered software can scan and process invoices, reducing the need for manual data entry and improving accuracy and efficiency. Hyphen has this built-in and ready for use by businesses and platforms serving other businesses.
- Risk assessment: AI algorithms and decision engines can analyze customer payment histories and creditworthiness to provide more accurate risk assessments and determine appropriate financing rates.
- Payment tracking: Automation can enable real-time payment tracking, allowing factors to quickly identify any payment delays or issues and take appropriate actions.
- Faster funding: Automation platforms can accelerate the funding process, providing businesses with quicker access to capital.
- Improved decision-making: By providing factors with more accurate and comprehensive data, AI-powered decision engines can enable better decision-making and risk management, resulting in more profitable financing deals for all parties involved.
Invoice Financing vs Accounts Receivable (AR) financing
Invoice financing and accounts receivable financing are similar in that they both involve using outstanding invoices to obtain financing for a business. However, there are some key differences between the two.
Invoice financing, also known as invoice factoring, involves a company selling its outstanding invoices to a third-party lender at a discount. The lender advances a percentage of the total value of the invoices, typically around 80% to 90%, and then collects the full amount from the company’s customers. Once the customers pay their invoices, the lender deducts its fees and interest, and then returns the remaining amount to the company.
AR financing, on the other hand, involves a business using its outstanding invoices as collateral to obtain a loan. The lender provides a loan based on the value of the outstanding invoices, and the company retains ownership of the invoices. The company is responsible for collecting the payments from its customers and paying back the loan with interest.
So while both invoice financing and AR financing use outstanding invoices to obtain financing, invoice financing involves the sale of invoices to a third-party lender, while accounts receivable financing involves using invoices as collateral for a loan.
In summary, by leveraging AI technology and automation, invoice financing workflows can be streamlined, reducing costs and improving efficiency and better insights into their financial operations.
Businesses use the Hyphen platform for managing payment operations, including cash management, payments, and accounting. If you are looking to automate your invoice factoring workflow or embed invoice factoring into your software, our no-code solution will get you started quickly. Reach out.