Local trade finance 

Invoice Financing For Small Business

August 7, 2023
Coffee roastery owner

The Benefits Of Invoice Financing For Small Business

Unpredictable cash flow and scarce cash reserves often pose significant challenges for businesses, particularly those trying to grow. This scenario is especially prevalent in the business-to-business (B2B) sector, where extended credit terms of 30, 60, or even 90 days are commonplace. In such situations, businesses often need help with cash flow shortfalls. Enter invoice financing for small businesses (and micro or medium) - a transformative solution that enables companies to access funds before purchasing raw materials. Invoice financing is a compelling alternative to conventional bank loans or credit lines, especially for companies that find traditional capital sources elusive or too slow.

Invoice Financing Explained

Invoice financing is a unique financing strategy that enables businesses to raise funds by either borrowing against pending invoices or before purchasing raw materials.

Predominantly, invoice financing can be divided into two categories - invoice factoring and invoice discounting. Both methods propose unique ways to improve cash flow, manage debt, and propel business growth. However, with Payabill, there is a third and better option.

Invoice Factoring

Invoice factoring operates on the premise that businesses sell their unpaid invoices to a third-party lender at a reduced price. This approach to funding is efficient and instantaneous, as the lender forwards the funds without delay and assumes the responsibility of collecting payment from the customer.

Invoice Discounting

In the case of invoice discounting, businesses secure a loan against their outstanding invoices whilst keeping them within their books. This mechanism allows companies greater control over their invoices and customer relationships, making it the preferred option for businesses looking to maintain a direct engagement with their customers.

Payabill’s unique invoice financing solution

In contrast to invoice factoring and discounting, Payabill presents a more innovative solution. While factoring and discounting require that your business already has an invoice to kickstart the financing process, Payabill comes in handy when your business lacks the cash flow to purchase raw materials or generate an invoice. This edge sets Payabill apart, facilitating access to funds for buying raw materials or assets before invoicing. In the South African business landscape, where many businesses might not have an invoice, traditional invoice financing options often fall short, leaving many businesses stagnant. Payabill's unique approach enables these businesses to thrive.

Examples Of Invoice Factoring vs Invoice Discounting vs Payabill’s solution

Let's suppose that your small business, "ABC Widgets," is preparing to sell a large order of widgets to "XYZ Corp." for R1,000,000. XYZ Corp. is known for paying its invoices, which usually take 60-90 days. Your business needs cash sooner to cover expenses like payroll, suppliers, or reinvestment into growth.

With invoice factoring, you sell the R1,000,000 invoice to a factoring company for a certain percentage of the total value, say 80% or R800,000. The factoring company gives you that R800,000 immediately and then takes over the responsibility of collecting the full R1,000,000 from XYZ Corp. Once XYZ Corp. pays the full amount, the factoring company gives you the remaining 20% (minus their fees).

Now, let's consider the same scenario but with invoice discounting. You still have the R1,000,000 invoice from XYZ Corp. and the need for immediate cash. In this case, you approach an invoice discounting company. They lend you a percentage of the invoice value, let's say 80% or R800,000, but you're still responsible for collecting the full payment from XYZ Corp. Once XYZ Corp. pays the full R1,000,000, you repay the R800,000 to the discounting company along with their fees.

With Payabill’s unique solution, the scenario is different. Let's assume that your business needs to buy raw materials or assets to produce the widgets for XYZ Corp., and the raw materials cost R300,000, which your business currently cannot afford. Here, Payabill provides the R300,000 to purchase the raw materials before you invoice XYZ Corp, by settling XYZ directly on your behalf over a term that suits your business, you repay Payabill , which enables you to fulfil the order, maintain cash flow, and grow your business without being tied to traditional invoice financing constraints, such as the requirement for an invoice.

Invoice Financing Process

A sound understanding of the invoice financing process can simplify the path for businesses looking to capitalise on this option.

  1. Application - the process begins with an online application where businesses provide information about their operations and financing requirements.
  2. Invoice selection - the following step involves businesses selecting the invoices or raw materials (in Payabill’s case) they wish to finance.
  3. Fund receipt - businesses receive the funds once agreeing to the financing terms.  In this case, Payabill will pay the wholesaler for your raw materials or assets.
  4. Repayment - The final step involves businesses repaying the borrowed amount. This will be based on your financing agreement with a lender such as Payabill.

How to select an invoice financing solution?

Choosing the right invoice financing solution requires careful consideration and research.

Here are some key factors to consider:

  • Cashflow for raw materials: Consider your business's cash flow for raw materials; if shortages are common, invoice financing could alleviate these issues.
  • Does your business have an invoice to start: If your business lacks an existing invoice that is owed to you, traditional financing may not work. Alternatives like Payabill can provide upfront funding for raw materials purchases.
  • Payment terms and speed: The speed at which a financier can deliver funds and their specific repayment terms are crucial factors to consider. Some providers can transfer funds within 24 hours of approval, while others may take longer. Understanding the terms and conditions of repayment will also help you manage your cash flow efficiently. Payabill offers a quicker payment, often only taking a few minutes.
  • Interest rates: Look for a provider that offers competitive interest rates. Remember, a lower interest rate means lower costs for your business. However, be sure to read the fine print to avoid any hidden charges.
  • Maximum loan amount: Consider your financing needs and choose a provider to meet them. Some lenders may offer a higher maximum loan amount, depending on the value of your invoices and the creditworthiness of your customers. Make sure the lender's offer aligns with your business needs.

The Eligibility Criteria for Typical Invoice Financing

To be eligible for invoice financing a business must provide various information, including basic details about the company, business bank statements, business financial reports, such as an accounts receivable ageing report, and the invoices or intended liabilities to be financed.

Read more: Effects Of Load Shedding On Businesses

Is Invoice Financing a Loan?

Invoice financing shares similarities with a traditional secured loan, boasting fixed payment terms, with interest charges accruing on outstanding balances.

In invoice factoring, the business receives cash not as a loan, but rather from a factoring company (also known as a factor), that purchases the invoice and assumes responsibility for its collection.

On the other hand, for invoice discounting, the lender simply advances a portion of the invoice value to the business as a loan, with the balance paid, less fees, when the customer pays the invoice.

With Payabill's unique solution, instead of advancing money against an invoice, Payabill provides funds upfront to buy raw materials even before an invoice is generated.


Businesses typically opt for invoice financing when experiencing a cash crunch or temporary cash flow issue or want to grow beyond their balance sheet; it demands significantly less paperwork and can be secured much quicker than traditional bank loans/financing.

If your business needs invoice financing for purchasing raw materials before invoicing, consider Payabill. Their unique solution brings balance and stability to your cash flow, even without an existing invoice.

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