Invoice finance is the general term used to describe the process of selling invoices for a percentage of their value.
Also known as accounts receivable finance, it is a useful means of improving working capital, particularly for those businesses with clients that take a long time to pay, or who may have been refused traditional bank finance.
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What are the Different Types of Invoice Finance?
The primary difference between these is whether the company or the factor collects the invoices.
How does Invoice Finance Work?
Invoice finance can release funds quickly, sometimes in as little as 24 hours.
Companies wishing to raise money on unpaid invoices first obtain a quote from a ‘factor’. Based on the amounts of money involved, and the level of risk, a percentage based commission is agreed upon and, once this is done, the factor advances typically up to 80% of the invoice.
The remaining 20%, minus the finance fee, is paid once the customer has settled the invoice, usually 30 to 60 days later.
- The client is invoiced.
- Invoices are sold to a ‘Factor’.
- Factor offers an advance of up to, say, 80%, sometimes within 24 hours.
- The client pays factor directly when the invoice is due, or the business as usual if ‘invoice discounting’ is used.
- After payment of the invoice, the factor forwards the remaining balance, minus the agreed charges.
What is the difference Between Invoice Financing and Factoring?
Invoice finance is simply the generic name for this area of the lending industry. The key differences are between factoring and discounting.
Invoice factoring usually involves the partner taking control of the sales ledger, meaning they will become responsible for collecting the invoice from the customer.
This gives them the added security of being able to use their debt collection methods, but there is a downside in that the borrower’s clients become aware of the process.
With invoice discounting, the business collects the payment itself as it always has, meaning full confidentiality is retained.
Can You Use Invoice Finance for Single Invoices?
Many providers specialise in what is known as 'spot factoring' or single invoice discounting. Many companies who may not need a finance provider for their whole sales ledger find themselves in the situation where a single large invoice places too much pressure on cash flow.
In this situation, single invoice discounting is an ideal solution, either as a one off or for the same customer every month.
How Much Does Invoice Finance Cost?
The costs of invoice finance are extremely varied between providers, and are also industry dependent, depending on historic levels of risk.
Administration Fees + Discount Charge
There is usually an administration charge and a charge for the actual factoring/discounting, both of which will reduce as the amounts of money borrowed increase.
We recommend comparing the rates of as many suppliers as possible to narrow down the field. Pricing is not the only deciding factor.
For example, if you are paying less your service may be adversely affected. You should also meet your potential partners to ensure you can work with them to ensure you get the best possible deal.
- You can gain access to money quickly, freeing up much need cash flow.
- Improved cash flow can keep relationships with supplier’s cordial, and enable the negotiation of better deals since terms can be more flexible.
- Confidentiality can be retained, meaning the clients need not become aware that finance has been utilised.
- Invoice Finance can support businesses which experience challenging seasonal fluctuations.
- Can be available to businesses for whom traditional bank finance is not available.
- Traditional finance may become less easy to get once you’re involved in factoring since your invoices become the assets of the finance company.
- Cost -the entire nature of factoring/discounting means that you will not receive the full percentage of your invoice. This is traded in return for improved cash-flow.
Recourse and Non-Recourse Invoice Finance
This terminology is commonly used in the invoice finance industry: with recourse means that, should the customer not pay the invoice, the borrower remains liable. Typically, invoice finance is with recourse as standard, unless otherwise arranged.
Choosing non-recourse will come with a higher rate but can bring the peace of mind that, should the customer default, the lender will assume responsibility with the debt.
Can a Company with Bad Credit Use Invoice Finance?
Unlike traditional forms of finance where the company credit score is a critical factor in approval, invoice factoring places much more emphasis on the credit score of the companies who owe the invoices.
Although standard due diligence is carried out, it is usually possible to arrange the finance even for those with less than perfect financial standing. Do contact us to learn which providers may be appropriate for your situation.
Is Invoice Finance Regulated?
Asset-based financing is not currently regulated by the FCA. This comes with advantages and disadvantages.
The benefits are related to cost, in that FCA regulation would certainly raise the costs for the lenders, and this would inevitably be passed on to borrowers in the form of increased charges.
The downside of an unregulated industry is of course the possibility of unscrupulous terms and conditions, hidden charges and so forth. For this reason we caution all prospective clients to due their due diligence with every provider.
Or you can speak with us anytime for free and confidential advice.