Guide to invoice financing & factoring

This ‘Guide to Invoice Finance’ aims to help you understand the world of invoice finance better, to get you through the industry jargon and enable you to consider how invoice finance can really benefit your business.

There are so many different terms and references made when talking about invoice finance, discounting or factoring, that it can become confusing. This guide aims to make things much clearer for you and your business.

What is Invoice Finance?

Invoice finance, sometimes referred to as factoring, is simply a way of improving your company’s cash flow. It is a method of raising cash against your business invoices through a reputable finance company. Invoice finance allows you to increase your working capital, whilst ensuring your business has the cash flow it needs to run efficiently today and to survive and grow in the future. This is particularly important in today’s business climate.

The difference between Invoice Factoring and Invoice Discounting

The differences between invoice factoring and invoice discounting are straightforward – the service you choose depends on the needs of your business.

Invoice factoring is when a business assigns its customer invoices as well as outsources the administration and debt management of its sales ledger to a finance company like us.

This method has benefits for you and your business. It frees up your time to concentrate on more productive issues instead of spending your time chasing payments. You can also reduce administration overheads and it’s a better option than arranging an overdraft with your bank. As your company grows, so does the available funding. You don’t even need to negotiate new terms.

Invoice discounting is a funding only service, when a loan is simply provided by the finance company, using the customer invoices as collateral. You retain control of your invoice administration and debt management. The finance company is essentially an invisible interface between you and your suppliers.

However If you choose confidential invoice discounting, the finance provider can handle the credit control, in a confidential manner, so that your clients are unaware of the involvement of the finance provider.

These methods of raising capital are usually more cost-effective than a bank loan or overdraft. They’re not dependent on the company’s credit rating as the company’s book debts are usually the only assets managed to secure funding.

Benefits of using Invoice Finance

There are a number of reasons why you might choose invoice finance for your business.

Some of the benefits are outlined below;

• 1. Improves cash flow – cash flow is the lifeblood of your business, so it’s important that it is managed effectively. Having access to money that is owed to your business will allow you to be more competitive and to further grow the business.
• 2. Releases cash – invoice finance enables you to raise cash against your business invoices, rather than having to wait weeks or months for payments.
• 3. Saves valuable time – your business is relieved of the administrative burden of invoice management, allowing you to concentrate on other important elements of your business.
• 4. Offers flexibility – invoice finance gives you better access to your finances, allowing you to be more flexible. You can also negotiate prompt payment discounts from your suppliers, giving you greater savings.

Step by step guide to the invoice finance process

In a nutshell, there are five simple steps to the invoice finance process.

• 1. You supply your goods or services to a customer and issue an invoice for payment. With factored invoices, they are issued as payable to the finance company.
• 2. You send a copy of that invoice to the finance company who then pays the agreed percentage advance against the invoice total, typically within a couple of days.
• 3. When your customer settles the invoice, payment will either be made direct to the finance company or in the case of invoice discounting, the payment may need to be made into a business account held with the lender.
• 4. The finance company then pays you the balance of the debt minus the agreed service charges.
• 5. Monthly sales ledger statements are issued to the borrowing business by the finance company.