Invoice Finance
Invoice finance enables a business to borrow money against the amounts outstanding from its customers. Many businesses will feel the pressure when large amounts of money are tied up in unpaid invoices. An invoice finance facility can boost cash flow and facilitate business growth.
An asset-based loan, invoice finance allows a business to access funding against its outstanding invoices. A company’s debtor book is generally one of its largest assets. Also known as accounts receivable financing, invoice financing can resolve problems associated with customers taking a long time to pay. It’s a means of improving cash flow. From paying employees to settling suppliers’ accounts, the funds can be used to finance the day-to-day running of a business. Alternatively, it can be reinvested in operations to enable growth.
When a business sells goods or services to large customers, it’s usually on a credit basis. This means that customers don’t have to pay immediately but instead receive an invoice with the amount outstanding and its due date. Credit terms can be from 30 up to as much as 120 days. While offering credit to customers encourages satisfaction and loyalty, it also ties up valuable cash.
Invoice factoring
Invoice financing is a form of short-term borrowing. Through the process of factoring, a business sells its accounts receivable to a third party at a discount, providing an effective way to improve cash flow. It allows a business to release cash from unpaid invoices rather than having to wait the 30 days or more for customers to settle their accounts.
The invoice factoring company provides the credit control service that recovers payment of the unpaid invoices. This enables an organisation to concentrate on other business needs instead of spending time chasing late payments.
Many invoice factoring providers offer flexible funding that increases in line with a business’ turnover. As a business grows, so too can the available funding.
A flexible factoring process generally involves a business sending their customers invoices that are payable to the factoring company. The factoring company receives a copy of the invoice, a percentage of the invoice amount is given to the business immediately and a fee is deducted from the business’ account, charged as a percentage of the amount lent.
When the customer settles their invoice in full, it is paid directly to the factoring company.
The invoice is cleared and the remaining balance is forwarded to the business, minus their finance fee.
Invoice discounting
Invoice discounting is a very similar process but there is an important difference. Invoice factoring companies actually purchase the unpaid invoices outright; whereas invoice discounting is a loan secured against the outstanding invoices.
With invoice discounting, the lender advances the business a percentage of the total amount of outstanding receivables. In this case, the business collects the invoice payments from its customers, not the lender; meaning customers are not aware of the arrangement. Invoice discounting enables a business to retain autonomy over customer service and communications.
Invoice financing can present lenders with a relatively low risk, as the outstanding invoices act as collateral. Risk is also mitigated as lenders don’t advance the full invoice amount to the borrowing business. Of course, there is the risk that a customer doesn’t pay which can result in a lengthy and expensive collection process.
Invoice finance provides financial support to enhance cash flow and fund business growth. Ideal for organisations of any size and from any sector, it provides prompt funding and peace of mind.
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