What is invoice purchasing?
Tuesday 4th October 2022
What is invoice purchasing?
Invoice purchasing is a form of finance that uses unpaid invoices. A business will sell its unpaid invoices to a third party speeding up access to the cash owed from customers, for a fee. Receiving finance through invoice purchasing is a short term option - the cash is received immediately and its cash flow boosted.
How does invoice purchasing work?
A third party finance provider will loan the business around 70 – 85% of an outstanding invoice for a fee and the business is responsible for chasing up the invoice from its customer and repaying the loan. The business pays a fee for the service to the finance provider but the customer doesn’t need to be aware of this arrangement; they pay their invoice as normal on maturity.
There are no long term commitments with this arrangement; once the loan and the fee are repaid the commitment to the finance provider is over. A business can receive the cash it needs whenever it is required, allowing them a level of control of their cash flow.
What is an example of invoice purchasing?
A company that sells furniture has a cash flow problem and is unlikely to be able to pay its bills in the following month. It currently has £10,000 owed to it from its outstanding invoices which it won’t receive until the end of the month in 30 days time. However, it needs cash now in order to pay its bills and to pay staff.
The company goes to a financial provider and shows them its receivable invoices. They agree on a 3% fee to the provider who then lends the company 75% of the invoices total value; £7500. The company receives this cash straight away and is therefore able to carry on its operations for another month. 30 days later, the furniture company receives payment of £10,000 from its customers and repays back the £7500 to the finance provider plus £300 in fees.