Invoice financing is a type of trade finance used to aid businesses locally and globally. Africa is finally waking up to the realities of self-determination and needs to also be a part of this conversation to aid trade internally and in the rest of the world. Starting at first principles, let us discuss why invoice financing is also a type of trade finance and not a stand-alone cash flow strategy.
What is trade finance?
Trade Finance is the financing of goods or services in a trade or transaction, from a supplier through to the end buyer. It accounts for 3% of global trade, worth some $3tn annually. ‘Trade Finance’ is an umbrella term, which includes a variety of financial instruments that can be used by an importer or exporter.
- Purchase Order Finance
- Stock Finance
- Structured Commodity Finance
- Invoice Finance (Discounting & Factoring)
- Supply Chain Finance
- Letters of Credit (LCs) and;
- Bonds & Guarantees
The terms Import Finance and Export Finance are used interchangeably with Trade Finance.
What really is Invoice Financing?
One school of thought says that invoice financing is the process of selling your outstanding customer invoices that are due and payable to a third-party firm.
Another school of thought says that invoice financing is between two businesses and a third-party financier. In the two scenarios a third party, an outstanding invoice, and an agreement between two parties are involved.
The third school of thought which is the closest or most profound definition is invoice financing is a planned approach to solving cash flow problems from the beginning of a transaction between a supplier and a buyer where two or more parties are involved in financing this solution.
But in all three definitions, the third-party firm is the factor because it pays the supplier cash immediately in exchange for the right to collect payment from your buyer customer at a future date, plus a fee.
When you hear this, you would think it is absurd that a business would want to sell their outstanding customer invoices? What do they stand to benefit from this process? Well as many business owners know, customer invoices are rarely paid within the shortest amount of time. In fact, from personal experience in Lagos, Nigeria, some businesses practice unethical payment terms and conditions by paying the supplier only after they have sold 60 – 80% of the products and in some very bad cases until they finish selling the products. In more established businesses in saner climes, most invoices are paid within 30, 60, or 120 days.
For business owners who need to handle ongoing expenses like rent, utilities, and employee paychecks on a weekly, bi-weekly, or monthly basis, these lengthy timeframes for customer invoice payments can cause a lot of stress.
Accounts Receivable Financing or Invoice Factoring
Invoice factoring which is also known as Accounts receivable financing allows businesses to secure the cash they need now, without waiting for 30 to 120 days for invoice payment. That means reduced stress when dealing with slow-paying customers, as well as the flexibility to use your money exactly when you need it. The best part? Invoice factoring doesn’t include the risks and complications of traditional bank loans and adds no liability to your business’s balance sheet.
At BWBMart, we are currently running multiple tests with our 3rd party financial partners on the best approach to make trade simple using invoice financing working capital strategies for interested buyers and sellers in Lagos, Nigeria locally in Africa. We are also doing the same thing between Nigerian exporters or sellers on our platform in Nigeria and the USA buyers who are also the importers. Contact us here if you want to sell your products in Nigeria or the USA through invoice financing.
Below is an infographic explaining invoice discounting from Trade Finance Global. Source: https://www.tradefinanceglobal.com/invoice-finance/infographic/