Factoring & Invoice Finance explained

With the right facility, invoice finance can be a cost-effective way of boosting growth and smoothing out seasonal trading, ensuring you can sell with confidence without worrying about the impact of large new contracts on your cashflow.

Have the facts before you apply
Invoice finance can be either a short or long-term funding option to release cash from your outstanding invoices.

In the past, large banks would seek to cover a 'book' of invoices on behalf of a company. With the emerging of new funding providers, it is now possible to fund just a single invoice in order to borrow money against the amount that is due from your clients.

There are three types of invoice finance:

Invoice Discounting
A type of invoice finance where the funder is advancing cash for unpaid invoices but the debt collection is conducted by the business themselves. Some providers offer you an invoice by invoice facility, others might require you to sell your debtor book for a predefined period of time. Generally, the lender advances between 70% and 85% of the invoice value and will release the remaining amount minus a small fee once they get paid by your client. Invoice discounting comes with a recourse or non-recourse option. What that means is that with recourse you would be required to pay back any amount advanced on invoices if the client of yours defaults on the payment. Non recourse is the option that passes on the risk of default to the lender.

Invoice factoring
A package of services including credit control that usually requires you to 'sell' the whole of your debtor book for a predefined time period (typically between 12 or 24 months). As a key difference to invoice discounting, lenders might advance as much as 95% of the invoice value.

Selective Invoice Finance (SIF)
This type of invoice finance allows you to pick and choose which invoices you want to fund. There is generally no contract tie-in making SIF a flexible option for businesses with a one-off requirement or for those who don’t need or want to fund their full sales ledger. Fees are only applied to the invoices you choose to fund which can make this an extremely cost effective option.
Advantages of invoice finance
Advantages include:
  • Improve cash flow without needing to wait 30, 60 or 90 days for your invoices to get paid; you get a high percentage of the invoice value advanced the moment you raise an invoice
  • Greater flexibility for you as invoice finance releases working capital that allows you to reinvest to grow your business
  • Unlike invoice factoring, invoice discounting can be fully confidential as you keep your credit control in house
  • Turnaround for setting up the facility can be considerably faster than other funding options. We are talking about days rather than weeks
  • Non-recourse factoring or discounting facility passes on the risk of your clients to default on payment to the lender
  • Some facilities come with built in credit insurance / bad debt protection
Disadvantages of invoice finance
Disadvantages include:
  • Some invoice factoring providers can tie you into a 12 or 24 months contract which would require you to sell your debtor book for the agreed time period
  • Invoice factoring (unlike invoice discounting) is not confidential as the lender will do the debtor chasing on your behalf and may need to validate the invoices they fund with your customer
  • Invoice factoring providers might offer a recourse factoring facility which would require you to refund the cash advance for a particular invoice if they are unable to collect the money from your client
  • In some instances the Annual Percentage Rate (APR) can be as high as 48% which means invoice finance should be considered a short-term option and a business loan might be the better long-term option
  • Not many invoice finance companies can advance money if stage payments have been agreed, which is the norm in certain industries, for example the construction industry
Funding
From £500 to £2.5 million
Terms
From 1 month to 2 years
Featured Funder

Finpoint is staffed with impartial finance experts that speak your language and are always ready to walk you through the pro's and con's of each option before you proceed. Decide without any pressure, safe in the knowledge you got the best funding solution for your business.

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