Sales financing is the practice of receiving funding from a bank or other lender, against a proportion of a company's approved invoices.
Usually a company offers customers credit, meaning that between an order being placed and settlement of the associated invoice, the company may have to make clever use of its existing cash-flow to pay suppliers and allow it to make further sales.
Financing this process provides immediate cash-flow, which can then be used as working capital to satisfy suppliers and meet the day-to-day operating costs.
There are two main forms of sales finance, both offering the benefits of a more consistent cash-flow.
Factoring
Selling your invoices to a third party company is known as factoring. A very popular form of sales financing for small to medium businesses, factoring provides a high percentage of each invoice value, within an agreed amount of time, sometimes as short as 24 hours.
The factoring company will handle all operations associated with invoicing, processing any payments and following-up on any accounts that fall outside of the specified terms agreed at the time of sale.
This type of sales financing has the added benefit of allowing the accounts department to concentrate on other areas of the business.
Invoice discounting
Another popular method of sales financing, invoice discounting still allows a company to borrow against their approved invoices, but retains control of invoicing, without customers having any knowledge of a factor company's involvement.
Any company that finds the gap between raising an invoice and receiving payment places a strain on their available working capital may want to consider sales financing.