Almost every company that’s growing will at some point in its lifecycle experience a shortage of cash-flow that can prevent it from making payments and investing in the business.

That can cause sleepless nights for the business owner, particularly if there’s no credit line such as an overdraft or credit card to turn to.

In many cases, the cause of cash-flow problems is invoice payment terms of 30, 60 or even 90 days. That can put businesses in a position where they’ve not received a penny for work they’ve completed up to three months previously. If your business is growing quickly and needs a regular injection of cash, that delay can cause serious problems.

The simple solution is to seek an external source of finance. There are two alternative financing options that can help to solve this specific problem: invoice factoring and sales ledger financing.

The two Financing Options

Large organisations can access flexible commercial lines of credit that they can use to boost their cash-flow when they need to. But getting that kind of credit from the banks is simply not an option for smaller businesses due to the tough qualification requirements and the personal guarantees they often request.

So what credit lines can smaller businesses access?  

  • Invoice factoring

One solution is invoice factoring. Invoice factoring allows smaller businesses with a limited track record to release up to 95 percent of the value of their invoices within 24 hours of an invoice being issued to a customer. An invoice factoring arrangement can be set up relatively quickly and even startup businesses can apply.

Invoice factoring is available to smaller businesses without an established track record because the finance provider manages the credit control and payment collections processes. The finance provider will run credit checks on prospective customers, collect the payments and deal with them directly. That reduces the risks for the finance provider and allows them to provide funding to smaller businesses that may not be able to access funding elsewhere.

  • Sales ledger financing

So, if larger organisations can access funding from the banks and small firms can benefit from invoice factoring, what do the medium-sized businesses do? Sales ledger financing is an alternative that can fit companies that have outgrown factoring but don’t qualify for a line of credit from the banks.

Sales ledger financing has many similarities with invoice factoring, in that funds are released from invoices by the finance provider before an invoice is paid by the customer. The key difference is that your business retains responsibility for every part of the process, so you continue to credit check and collect payments from your customers. That can offer a better experience for your customers and help to protect sensitive business relationships.   

Key differences between invoice factoring and sales ledger financing

There are a number of key differences between invoice factoring and sales ledger financing in terms of their flexibility, cost and ease of use. That includes:

The funding process

The funding process for an invoice factoring deal requires a lot more paperwork than a sales ledger financing arrangement. To get invoices factored, you have to submit a legal document called a Schedule of Accounts that lists every invoice you want to raise finance against. You also have to submit each individual invoice for funding and provide backup documentation to verify that the products or services have been delivered. That can take time.  

In sales ledger financing, you can get funding by simply submitting a copy of your sales ledger. That can be generated quickly using your current invoicing system. From your customers’ perspective, the sales ledger financing process is much simpler as they will continue dealing with your business and make payments to you directly.  

The responsibility for collecting payments

In an invoice factoring arrangement, the responsibility for credit control and the collections process passes to the invoice finance provider. While that could be seen as a disadvantage because you will lose an element of control, it can also be a benefit to some businesses. Credit control and collections processes demand significant resources and time. Passing the responsibility to a dedicated team can free you up to focus on growing your business.

In sales ledger financing, the responsibility for credit control and collections remains with you. That can be beneficial for your business as it allows you to retain complete control of the interactions you have with your customers. However, it does mean you have to continue to assign resources to these processes

The pricing structure and cost

The cost of sales ledger financing is less than a comparably sized factoring arrangement because you do not have to pay a fee for the management and administration of the credit control and collections processes. There’s also a credit protection fee involved in a non-recourse invoice factoring deal that protects the finance provider against the cost of bad debts which is based on the level of risk your debtor book presents. That’s another fee which does not have to be paid in a sales ledger financing arrangement.

Invoice verification

As part of their funding procedures, invoice factoring providers will verify the majority of the invoices they fund to ensure they are accurate and error free. The verification process will be completed before the funds are released and can lead to a delay in the transfer of the advance.

The verification process in sales ledger financing still takes place, but as the finance provider is not responsible for the business’s credit control process, it tends to be much softer and doesn’t involve contacting your customers directly.

Who can apply

Invoice factoring is the less risky of the two finance options because the factor manages the credit control and collections processes. That means acceptance is virtually guaranteed, even for small businesses that are struggling financially or even threatened with insolvency.

Sales ledger financing is a much riskier prospect for the finance provider as it does not have any direct contact with your debtors or control over the collections process. For that reason, sales ledger financing providers only tend to work with businesses that have a turnover in excess of £100,000 and a positive net worth on their balance sheets. They also may look at the creditworthiness of your customers before agreeing to an arrangement.   

The size of the initial advance

Both invoice factoring and sales ledger financing providers will only fund a percentage of the invoice. The proportion of the invoice’s value you will receive upfront varies between providers but will fall between 70 and 95 percent. Given the fact that sales ledger finance providers work with financially stable, more established businesses, the size of the initial advance tends to be greater.

Which is the right option for you?

If you run a small business that’s just starting out or that has had problems with credit control or collecting payments in the past, then invoice factoring is likely to be the best option. While factoring offers a solid solution because of the increased services it provides, it will take a slightly bigger bite out of your profit margins due to the additional costs.

On the other hand, if you run an established business with proven credit control processes and want to protect the relationships you have with your customers, sales ledger financing is likely to be the better fit.

Looking for an invoice factoring or sales ledger financing deal?

Whatever finance option is better suited to your company, at Business Expert, you can compare quotes from more than 40 of the UK’s leading providers. Compare providers and you could be funded in just 3 minutes.