Invoice financing, receivables financing and invoice discounting, are terms often used interchangeably as they share many characteristics.
For example, these facilities accelerate a business’s cash flow, allowing them to pay employees, suppliers, and other expenses faster.
How Does Invoice Financing Work?
Invoice financing share the same process flow with other Invoice-based lending facilities, which can be summed up in a few steps:
- A business invoices a client for goods provided, giving them 30-120 days to pay (invoice maturity)
- The business transfers the invoice to a third-party financing company (financier)
- Funds are made available at a percentage (usually ~80%) of the invoice face value
- The customer makes the invoice payment at maturity
- Upon receiving the amount from the buyer, the financier remits the balance back to the business minus fees
However, there is a substantial difference in terms of liability for missing payments (when the buyer doesn’t settle the invoice at maturity).
To protect the business responsibility and liability for buyers missing payments, the business can choose to finance with or without recourse.
Still uncertain on how it works? Watch our invoice financing process video.
What is the Difference Between Recourse and Non-Recourse Financing?
In Recourse Financing, the financier has the right to sell back the invoice to the business if its’ buyer fails to repay. However, with non-recourse financing, the receivables ownership is fully transferred to the financier.
With recourse financing, the business:
- Is liable to pay for any non-payments from the buyer
- Keeps the invoice as an account receivable in its balance sheet
While in non-recourse financing, the invoice is no longer a receivable on the seller’s balance sheet, and the financier is liable to chase buyers for repayments.
